Retiring abroad can be exciting, but it isn’t necessarily easy. You’ll need to navigate visa and residency requirements, find housing and maybe learn another language before moving. And once you’re there, the logistical challenges continue.
Expats must also understand their tax obligations as U.S. citizens and what their host country might require.
Here’s what every expat should know about taxes.
U.S. Citizens Living Abroad Must File an Annual Tax Return With the IRS
Leaving the country doesn’t mean the end of annual tax filings for American expats.
“The U.S. is one of the few countries that requires citizens living abroad to file taxes,” says Mike Wallace, CEO of Greenback Expat Tax Services in Detroit, which specializes in tax preparation services for U.S. expats.
While most countries only tax income earned within their borders, the United States taxes the worldwide income of its citizens. That makes it one of only two countries in the world with a citizenship-based taxation system. The other country is Eritrea in East Africa.
[READ: How to Retire in Canada.]
Tax Returns Aren’t Due Until June 15 for Expats
While expats must file an annual tax return, they get an extra two months to do so. U.S. citizens living and working abroad get an automatic extension for their tax return, making their filing deadline June 15. Like U.S.-based taxpayers, they can also request an additional extension if they need more time to complete their return.
However, tax payments are still due by April 15, Wallace says. Failure to pay what you owe could result in tax penalties and interest charges.
You May Have to File a Tax Return in Your Country of Residence
Since most countries have residence-based tax systems, U.S. expats may also have to file a return in the country where they live.
“Most countries only have a short period of exclusion,” says Miklos Ringbauer, a certified public accountant and founder of MiklosCPA in Los Angeles, which counts expats among its clients. In other words, you may not have to live in a country long before you are required to file taxes there.
Spain, for example, considers someone to be a tax resident if they spend more than 183 days in a calendar year in the country.
[Read: How to Retire in France]
Some Countries May Tax Retirement Income
It isn’t just earned income that a foreign country may tax. If you retire overseas and receive money from investments and retirement accounts, that too may be subject to tax, depending on the nation’s laws.
However, some governments offer tax incentives to attract foreign expats and retirees.
Belize has a qualified retirement program available to expats who are at least 40 years old, have citizenship in a qualifying country and have a retirement income of at least $2,000 per month. Those who qualify don’t have to pay any taxes on income received from a source outside of Belize, such as Social Security or a U.S. pension.
Panama, Costa Rica and the Philippines are other countries with favorable tax laws for U.S. expats and do not tax retirement income.
The Foreign Tax Credit Is Intended to Avoid Double Taxation
The combination of the U.S. citizenship-based tax system and other countries’ residence-based systems isn’t ideal for expats.
“It does result in double taxation,” Wallace says. But the U.S. offers ways to compensate, he adds.
Chief among those is the foreign tax credit, which can be applied to your U.S. tax liability. This is a dollar-for-dollar credit calculated that takes into account your foreign income and your U.S. income for the year. If you cannot use all your credit in one tax year, it can be carried back to the previous year or carried forward for up to 10 years.
The Foreign Earned Income Exclusion and Foreign Housing Exclusion
Expats also have two other options to reduce their U.S. taxes: the foreign earned income exclusion and the foreign housing exclusion.
The foreign earned income exclusion allows you to exclude a portion of income earned in a foreign country from your U.S. tax return. For the 2024 tax year, up to $126,500 in eligible foreign income could be excluded on a U.S. tax return. The foreign housing exclusion allows money spent on eligible and reasonable housing in a foreign country, up to a limit, to be deducted from U.S. federal taxes.
For both tax incentives, you’ll need to be either a bona fide resident of the foreign country or have a physical presence in a country or countries for at least 330 days during 12 consecutive months.
You can’t use the foreign tax credit and the exclusion together, so carefully consider your tax rate in both countries to determine which option is best.
[Read: How to Retire in Mexico]
States Have Their Own Tax Rules
Understanding federal tax obligations is only half the battle for expats. If they are still maintaining a home in the U.S., they also need to be aware of their state tax liability.
While many states will honor federal credits and deductions, that isn’t always the case. For example, California doesn’t recognize the foreign earned income exclusion. That means if you have a home in California but work in another country, you could be taxed twice for more than six figures of income. Someone who has left the state for at least 546 days for an employment-related contract may qualify as a nonresident.
For that reason, if you plan to maintain a U.S. residence while living overseas, be smart about where you choose as your home base.
Talk to an Experienced Tax Professional Before Moving
Expats shouldn’t wait until they have established residency in another country to talk to an accountant.
“Before they buy their plane ticket and leave the country, do appropriate tax planning,” Ringbauer says.
Not only will this help you select a tax-friendly country, but it will also prevent you from making costly mistakes, according to Ringbauer. Opening a foreign brokerage account, buying an overseas rental property or earning self-employment income in another country could all trigger special tax situations.
Avoid a surprise bill by checking in with a professional before you decide to live or retire in paradise.
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Retiring Abroad? What Expats Need to Know About Taxes originally appeared on usnews.com
Update 04/11/25: This story was published at an earlier date and has been updated with new information.
