What is an 'Expatriate'

An expatriate is an individual living in a country other than his or her 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.

BREAKING DOWN 'Expatriate'

An expatriate is a migrant worker who is a professional or skilled worker in his or her profession. The worker takes a position outside his/her home country, either independently or as a work assignment scheduled by the employer which can be a company, university, government, or non-governmental organisation. 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. Living as an expatriate can be exciting and present a great 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.

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. However, to avoid double taxation on expats’ income, the U.S. tax code contains provisions that help to reduce the 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 2018, this amount is $104,100. An expat that earns, say $180,000, from his job in a foreign country that is tax free will only need to pay U.S. federal income tax on $180,000 - $104,100 = $75,900.

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 that expats are not double taxed on their capital gains. For example, assume an expat falls in the 35% income tax bracket in the U.S. This means his long-term capital gain on any investment will be taxed at 15%. 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 he works, he’ll only have to pay 5% tax to the U.S. Likewise if he pays no tax to the foreign country, he’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 US rate), the expat will forfeit that amount. The credit, however, can be carried into the future.

Expatriation Tax

An individual who has renounced his/her 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 $162,000 (as of 2017) 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
RELATED TERMS
  1. Foreign Earned Income Exclusion

    The foreign earned income exclusion excludes income earned and ...
  2. Bilateral Tax Agreement

    An arrangement between two jurisdictions that codifies tax laws ...
  3. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  4. Split Payroll

    Split payroll is method of paying employees who are on international ...
  5. IRS Publication 54

    A document published by the Internal Revenue Service that outlines ...
  6. Tax Haven

    A tax haven is a country that offers foreigners little or no ...
Related Articles
  1. Taxes

    How American Expats Are Taxed

    Learn what tax forms American expats are required to file, what tax breaks and deductions are available, and what potential pitfalls to avoid.
  2. Retirement

    Financial Implications Of Retiring Abroad

    Retiring abroad sounds like a dream come true. We tell you what you need to know before that happens.
  3. Personal Finance

    U.S. and U.K. Losing Their Appeal to Expats

    In 2014 the U.S. ranked 5th – and the U.K. 21st – in a list of good places for expats to live and work. Now they've tumbled to 43rd and 54th. Here's why.
  4. Taxes

    How to Reduce U.S. Taxes on Foreign Income

    IRS rules allow for a few ways to reduce taxes on foreign-earned income.
  5. Managing Wealth

    Record Number of People Renounced Their U.S. Citizenship in 2016

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
  6. Taxes

    Which Countries Have the Highest Taxes on High Incomes?

    For high earners in these countries, the tax rate percentage on income exceeding a certain threshold can reach into the high 50s and low 60s.
  7. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  8. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  9. Taxes

    Comparing Long-Term vs. Short-Term Capital Gains Tax Rates

    A firm understanding of the difference between the taxation of long- and short-term capital gains is crucial to ensuring the benefits of your investment portfolio outweigh the costs.
  10. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Trading Center