Introduction
Moving back to the United States after living abroad can be an exciting yet complex process, especially when it comes to taxes. As an expat returning home, you may need to navigate expat tax obligations that differ from those you faced while living overseas. Understanding the financial and legal implications can help you prepare for a smooth transition and avoid unexpected liabilities.
Determining Your Tax Residency Status
One of the first considerations upon returning to the US is your tax residency status. The Internal Revenue Service (IRS) treats US citizens and green card holders as tax residents regardless of where they live. However, if you claimed the Foreign Earned Income Exclusion (FEIE) or used the Foreign Tax Credit (FTC) while living abroad, you must determine when you officially resume full US tax residency.
Key points to consider:
- If you maintained a home in the US or had significant ties, you might have remained a tax resident.
- If you were a non-resident for tax purposes and re-establish US residency, you will be taxed on worldwide income from the date of your return.
- Ending foreign tax obligations may require filing a final tax return in your host country.
Worldwide Income and Double Taxation Risks
Upon returning to the US, all global income—including wages, foreign pensions, rental income, and investments—is subject to US taxation. If you earned income abroad before returning, you might be taxed in both the US and your former country of residence.
To avoid double taxation, consider:
- Foreign Tax Credit (FTC): If you paid taxes abroad, you may be eligible for credits against your US tax liability.
- Tax Treaties: Some countries have treaties with the US that provide tax relief and prevent double taxation.
- Capital Gains Considerations: Selling foreign property before or after your move may have tax implications in both countries.
Handling Foreign Assets and Bank Accounts
If you hold foreign bank accounts, assets, or investments, you may still be subject to reporting requirements. Failure to comply can lead to hefty penalties.
Key Reporting Obligations:
- FBAR (Foreign Bank Account Report): If your foreign financial accounts exceeded $10,000 at any time during the year, you must file an FBAR (FinCEN Form 114).
- FATCA (Foreign Account Tax Compliance Act): If your foreign assets exceed certain thresholds, you may need to file Form 8938 with your tax return.
- PFIC (Passive Foreign Investment Companies): Foreign mutual funds and investment accounts may be taxed at higher rates.
Before moving back, it may be beneficial to restructure your accounts to minimize tax burdens.
State Tax Considerations
Even after years of living abroad, you might still owe state taxes upon returning, depending on where you previously lived. Some states (such as California and New York) have strict residency rules and may require tax filings even if you spent years overseas.
Key Questions to Ask:
- Did you maintain a home or driver’s license in a specific state while abroad?
- Are you planning to return to your former state, or are you relocating to a tax-friendly state?
- Does your state recognize the same foreign income exclusions as the IRS?
If possible, consider establishing residency in a tax-friendly state (such as Florida or Texas) upon your return.
Retirement Accounts and Social Security
Returning to the US may affect your retirement plans, particularly if you contributed to foreign pension schemes.
Considerations:
- Foreign Pensions: Some foreign pensions may be taxable in the US, even if they were tax-deferred abroad.
- IRA & 401(k) Plans: If you have US-based retirement accounts, check contribution and withdrawal rules upon return.
- Social Security Benefits: If you paid into a foreign social security system, check if a Totalization Agreement exists to combine your benefits with US Social Security.
Tax Planning Before Moving Back
Strategic planning before your move can help minimize tax burdens. Consider:
- Timing Your Move: If possible, plan your return strategically to optimize tax treatment for the current year.
- Selling Foreign Assets: Understand capital gains tax implications before liquidating foreign property or investments.
- Closing Foreign Bank Accounts: Simplifying financial holdings can reduce reporting obligations.
Consulting a tax professional with expertise in expat returns can help you navigate these complexities and ensure compliance with both US and foreign tax laws.
Conclusion
Moving back to the US after living abroad comes with a range of tax implications, from global income taxation to state tax obligations and foreign asset reporting. Understanding these complexities in advance can help you avoid penalties and optimize your tax situation. By carefully planning your return, ensuring compliance with IRS requirements, and seeking professional advice, you can transition smoothly back into the US tax system while minimizing financial burdens.
