I've been living abroad for 12 years and wasn't even aware that I was expected to pay taxes in the states. Presumably if I ever move back to the US to work this is going to bite me in the proverbial...
As David927 mentions you probably don't owe anything. But you still need to file 1040's and 2555 for every year. So few Americans actually do it, you get the feeling that they are so happy to just receive them. Before returning to the US I did a batch of 5 tax returns with no tax liability.
The other thing to note is that if you are married even to a foreign spouse without green card you can file jointly and you now get a full $182,800 exclusion. There are also rules where you can deduct further for housing expenses as well as tax paid locally.
The bad news though is that for entrepreneurs, consultants etc. If you are self employed, in a partnership (including LLC's) you are not exempt from paying self employment tax (15.3% of the first $106,000 earned.
This is likely the biggest issue for some of the people renouncing citizenship.
The second issue also mentioned in the article is reporting of bank accounts containing more than $10k.
Final bad news for US entrepreneurs abroad is that your startup might be classified as a Controlled Foreign Corporation, which in theory could lead to it being taxed in the US. These rules are so complex they make my head hurt just thinking of them. This PDF seems to explain it fairly well:
As a US expat, I setup an S-corp for 2009 and it is VERY beneficial for consultants who live abroad and can setup their own US company: because it allows me to pay myself a reasonable salary underneath the Foreign Earned Income Exclusion; to take business expenses against the remainder, and most importantly, NO self-employment tax.
I hadn't thought about that. Very good idea. The only issue is that cofounders have to be US citizens/residents. But it sounds like it would work well if you don't need that.
Huge upvote for this. This is excellent advice - my partner had the same situation last year. An entrepreneur making < $91k should most certainly do this asap!
Ass..uming that you make less than $91,500, and that you haven't been back for more than 30 days, you're ok. The Foreign Earned Income Exclusion means that "Americans working abroad can exclude up to $91500 per year from their US taxable income."
You pay the country you live in first, or else the US Embassy in Stockholm, various international tax accountant/lawyers and every double taxation treaty I've seen is wrong.
That's not what my tax specialist says. It probably varies depending on the country the treaty is with or maybe there's something nutty about my income.
Trust me, I don't misremember - it made me mad as hell.
Hey if the US and Austria (I believe I saw you comment somewhere else that it is where you live) then that's really what matters. Here employment taxes are taken out like in the US, you never see the money so it would be impossible to pay the US first and then the local tax authority. My company registration is Swedish and my only ties to the US are citizenship, a credit card and bank account.
Your expert disagrees with what mine told me, and it seems to disagree with the IRS as well. I'd suggest you obtain a second opinion if this situation is relevant to your life.
You should go back and file past years if you can, so long as you have filed for the past 5 or 7 years (whatever the IRS's window to audit or call into question a return is) you will be fine. You pay your local taxes first and then file the federal paying any amount above and beyond what you've paid (assuming a double taxation treaty exists). Rule of thumb if you aren't making a ton of money and the local tax burden is more than the federal burden you won't owe anything, but you still have to do the paperwork.
