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.
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 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. 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.
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 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 2019, this amount is $105,900. 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 - $105,900 = $74,100.
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 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'd 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.
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 $168,000 (as of 2019) 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