What Is an Expatriate?
An expatriate, or expat, is an individual living and/or working in a country other than their country of citizenship, often temporarily and for work reasons. An expatriate can also be an individual who has relinquished citizenship in their home country to become a citizen of another.
- An expatriate is somebody who has left their country of origin in order to reside in another country.
- Expats may leave home for work reasons and seek more lucrative employment in a different country.
- Expatriates may live for a while overseas or completely renounce their citizenship of one country in favor of another.
- Retiring abroad has become an increasingly popular option.
- The IRS may impose an expatriation tax on individuals?who renounce?their citizenship, usually?based on the value of a taxpayer's property or income in the United States.
An expatriate is a migrant worker who is a professional or skilled worker in their profession. The worker takes a position outside of their home country, either independently or as a work assignment scheduled by the employer, which can be a company, university, government, or non-governmental organization.
If your employer sends you from your job in its Silicon Valley office to work for an extended period in its Toronto office, you would be considered an expatriate or "expat" after you arrive in Toronto.
Expats usually earn more than they would at home, and more than local employees. In addition to salary, businesses sometimes give their expatriate employees benefits such as relocation assistance and housing allowance. The expat will need to open a local bank account that will allow them to function in their new home.
Living as an expatriate can be exciting and present an excellent opportunity for career advancement and global business exposure, but it can also be an emotionally difficult transition that involves separation from friends and family while adjusting to an unfamiliar culture and work environment. Hence, the reason behind the higher compensation offered to these migrant workers.
Special Considerations: Retiring Abroad
Much expatriation occurs during retirement. While most Americans spend their retirement in the U.S., a growing number are opting to retire overseas. People are motivated to relocate abroad at an older age for several reasons, including lower cost of living, better climate, access to beaches, or some combination of those and other reasons. However, it can also be tricky to navigate taxes, long-stay visas, and the language and cultural differences experienced when settling down in other countries.
Popular retirement destinations include countries in Central and South America, the Mediterranean, and parts of Europe.
A common choice presented to a retiree expat is between permanent residency and dual citizenship. Note that neither dual citizenship nor residency gets you out of filing a U.S.?tax return?every year. It is both surprising and burdensome, but Americans still have to pay income taxes wherever they live, and they owe it no matter where their income was earned.
You may also have to file an income tax return in your country of residence, although most deduct the amount American residents pay to the U.S. via treaties that minimize double taxation.
If you're a retiree or near-retiree who's on the fence, you face a tough decision that will require some soul searching and research—and maybe a trip abroad (or several) to test the waters before you make any decisions.
Foreign Earned Income Exclusion
For Americans working abroad as expatriates, complying with United States income tax regulations is an added challenge and financial burden because the U.S. taxes its citizens on income earned abroad. To avoid double taxation, the U.S. tax code contains provisions that help to reduce tax liability. Taxes paid in a foreign country can be used as a tax credit in the U.S., which when applied against the expat’s tax bill, reduces it.
The Foreign Earned Income Exclusion (FEIE), for example, allows expats to exclude from their tax returns a certain amount of their foreign income, which is indexed to inflation. For 2023, this amount is $120,000. For 2024, it is $126,500. An expat that earns, say $180,000 in 2023 from their job in a foreign country that is tax-free will only need to pay U.S. federal income tax on $180,000 - $120,00 = $60,000.
Foreign Tax Credit
The FEIE does not apply to rental income or investment income. Therefore, any income made from interest or capital gains from investments will have to be reported to the IRS. The Foreign Tax Credit (FTC) is a provision that ensures expats are not double-taxed on their capital gains.
Since the FTC provides a dollar-for-dollar credit against taxes paid to a foreign country if the expat paid 10% tax to the country where they work, they'd only have to pay 5% tax to the U.S. Likewise, if they pay no tax to the foreign country, they’ll owe the full 15% tax to the U.S. government.
If the income tax paid to a foreign government far exceeds the amount of the credit (because the foreign tax rate far exceeded the U.S. rate), the expat will forfeit that amount. The credit, however, can be carried into the future.
An individual who has renounced their citizenship in their home country and moves to another is also referred to as an expatriate for tax purposes and is subject to an exit tax known as expatriation tax.
According to the Internal Revenue Service (IRS), the expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their U.S. residency for tax purposes, if one of the principal purposes of the action is the avoidance of U.S. taxes.
This emigration tax applies to individuals who:
- Have a net worth of at least $2 million on the date of expatriation or termination of residency
- Have an average annual net income tax liability that is more than $190,000 if the expatriation date was in 2023 ($201,000 if the expatriation date is in 2024) over the five years ending before the date of expatriation or termination of residency
- Do not (or cannot) certify five years of U.S. tax compliance for the five years preceding the date of their expatriation or termination of residency
Advantages and Disadvantages of Becoming an Expatriate
Living and working in another country for an extended period of time can have its benefits. These can range from new experiences and adventure to more practical considerations like a lower cost of living or being closer to extended family abroad. Depending on where you settle, you may also get government perks like free healthcare and education and more favorable taxation.
There are also some potential drawbacks. Regarding taxation, unless you fully relinquish your American citizenship, you will still need to file tax returns each year and may need to pay taxes to Uncle Sam, even on income earned in your new country.
You'll also be a long way from home, potentially. This can make seeing friends and family more difficult, and time zone differences can also interfere with finding a good time to link up by phone or video chat. Learning a new language and customs can also be difficult for some, and certain items or products that you like may not be available where you live. And remember that not all countries enjoy the same level of political and economic stability that the U.S. does.
New experiences and maybe a better climate
Potentially lower cost of living
Potential access to affordable healthcare
Potential for double taxation
Long way away from friends and family
Language, cultural, political, and economic barriers
Potential challenges securing the proper visa
What Does It Mean to Become an Expatriate?
An expatriate or "expat" is somebody who leaves their country of origin and settles abroad for an extended period of time, often permanently.
What Is Expat Taxation?
Americans living overseas still have to file U.S. tax returns unless they relinquish their American citizenship. Several international tax treaties exist to help minimize double taxation.
What Is an Expat Community?
When people relocate to a foreign country, they often find comfort in seeking out other foreigners, especially from their home country. Expat communities are enclaves of people from a similar national origin, often with their own school and shopping options. In many countries, English-speaking enclaves are called "Anglo" communities.
The Bottom Line
Expats typically have to navigate a complex web of tax rules and regulations, which can be challenging to understand and comply with. Though retiring abroad to a lower cost of living, there are retirement considerations to comply with. In addition, expat U.S. Federal taxes are complicated, though they may rely on tax credits and income exclusions to receive favorable U.S. tax treatment.