Taxes for Expats: 9 Debunked US Expat Tax Myths

At Nomad Capitalist, we’ve worked with many former US citizens, soon-to-be-former US citizens and overpaying US citizens. 

Through the thousands of clients we’ve served, it’s clear that there are a lot of US expat tax myths that so many people believe. 

Some people say that you can’t save on taxes when you’re offshore, while others boast about just how easy it is. 

In our (not-inconsiderable) experience, both sets of claims are wide of the mark.

A lot of entrepreneurs have read blogs or seen news articles about expat tax issues and renunciation, but most of them have never actually sat down with someone to go over all their questions.

So, the Nomad Capitalist team decided to do a little digging and take a look at some of the most popular expat tax myths surrounding citizenship-based taxation, digital nomads and renunciants from the United States. 

And if you take away just one thing from our findings, it should be this: offshore tax is more complicated than domestic tax and definitely more work. However, if you’re a seven- or eight-figure entrepreneur, that extra work is well worth it. 

Taxes for Expats: The Basics

Before we debunk the biggest US expat tax myths, let’s cover the basics of what you need to know as a US expat. Most importantly:

• All Americans must file a US Federal Tax Return, no matter where they live
• While you can’t avoid your filing requirements, you can take advantage of tax credits and deductions to seriously lower your tax bill.

Navigating US taxes as an expat can be complex due to the country’s unique citizenship-based taxation system. Unlike most other nations, the US requires its citizens and Green Card holders to report their worldwide income, no matter where they live. 

This means that moving abroad doesn’t automatically exempt you from filing US tax returns or potential tax liabilities. However, expats can take advantage of legal strategies (we’ll cover these below) to reduce or even eliminate their tax burden. 

Proper planning is key to optimising tax savings while remaining compliant with IRS regulations.

Before leaving the US, setting up an offshore structure or making any major financial decisions, it’s crucial to understand the rules and avoid common myths. 

Some believe that renouncing US citizenship is the only way to achieve tax savings, while others assume that simply living overseas means they no longer need to file taxes – both are misconceptions. 

With the right strategy, including selecting tax-friendly jurisdictions, structuring businesses correctly and working with the right expat tax experts, you can significantly reduce your taxes while staying on the right side of the law.

Tax for Expats Myth #1: You Can’t Reduce Taxes if You Go Offshore

New laws come into effect all the time, which is what this myth builds upon.

Some ‘advisors’ say that because of the way American taxation law works now, there is no benefit to going offshore. 

‘Sure,’ they say, ‘you could save yourself as much as the Foreign Earned Income Exclusion (FEIE) allows that year, but if you’re making any kind of serious money, you won’t be able to save much or anything at all’.

The truth is, with proper planning, you can reduce your taxes legally if you go offshore. 

Most of the seven- and eight-figure entrepreneurs who work with Nomad Capitalist are paying something, but there’s a big difference between ‘something’ and ‘everything’.

Substantial tax savings remain achievable for Americans, even with the current tax laws. The key lies in strategic planning, including selecting a suitable offshore jurisdiction that aligns with US tax regulations.

Tax for Expats Myth #2: You’ll Have to Renounce Your US Citizenship

Most people seem to think that Americans can no longer save money on taxes by going offshore unless they renounce their US citizenship. 

There’s a Nomad Capitalist client who had been living outside of the United States for the last number of years but was still paying a decent chunk in US income taxes every year. 

He seemed astonished that people could retain their US citizenship yet still reduce their taxes. Basically, he wanted to know how to do the same.

This entrepreneur, who was also entitled to Canadian citizenship through his mother, was weighing the idea of renouncing US citizenship in order to save on taxes. 

However, as is so often the case, his US tax advisor was totally clueless as to the many expat tax strategies available to Americans living overseas and had not advised his client properly. 

Instead, this entrepreneur had overpaid on taxes by an amount well into the six figures.

Let this sink in: if you’re a US citizen entrepreneur living overseas (or willing to live overseas), chances are you can substantially reduce your US tax bill to much lower than it is now.

There’s even a good chance you could pay zero.

The main challenge with basing your offshore strategy on what you read in the media is that you’ll probably make mistakes. 

While the news has indeed been buzzing with record numbers of Americans renouncing their citizenship, allegedly for tax reasons, the truth is that 90% of entrepreneurs do NOT need to renounce US citizenship to enjoy lower tax rates. 

And they can do it legally.

The biggest issue with entrepreneurs who think they need to renounce is that their company is still based in the United States. 

By using a US legal entity, even a small business with most of its workforce offshore will leave the owner with tens of thousands of dollars in Social Security and Medicare taxes, in addition to corporate tax if the business is a C Corporation. 

Move your business offshore, and you cut out a big part of the problem.

Tax for Expats Myth #3: You’ll Need a Complicated Offshore Structure

Once you decide to move your business offshore, an endless array of options awaits.

Should you form a Hong Kong company, a BVI company, a Belize company or a Marshall Islands company? Should you be like the ‘cool kid’ digital nomads who rave about Estonia?

Just figuring out which country to be based in is a challenge. Moreover, the wrong decision could lead to unforeseen consequences. 

For example, while Estonia companies are often touted as ‘tax-free’, they’re only tax-free until you take money out. Then, you have to pay 20%. 

So, if you buy into the hype from people promoting Estonia, you could cost yourself tens, if not hundreds, of thousands of dollars.

In terms of structures, be cautious. Choosing an overly simple structure could be a mistake. After all, the easiest things to get into are sometimes the hardest to get out of. 

However, creating an overly complicated structure can also be a big mistake.

Chances are you don’t need two Nevis IBCs, each owned by a Belize IBC, which, in turn, is owned by a Panama foundation, in order to minimise your tax burden. 

In fact, these types of complicated structures can often cause problems for US citizen taxpayers. Scour the offshore blogosphere and you’ll no doubt find plenty of promoters offering these ‘stacked structures’.

In most cases, these stacked structures do nothing but incur a lot of annual maintenance costs as the ‘beast’ that is this mass of companies needs to be fed, from statutory agent fees to registry renewal fees.

Some of these promoters are US citizens themselves and should know better, yet hide behind fake names and stock photos. Many others are simply ignorant and don’t understand US tax law.

This is why it’s so important to create the simplest structure possible to lower your taxes. Extra layers of complication could cause problems with the IRS.

The reason behind this is that some of the holding company structures involving stuff like billing and intellectual property could be classified as Subpart F income under US tax law.

Sadly, US citizens must follow their own set of rules that most offshore company formation services don’t understand.

Tax for Expats Myth 4: You Can’t Hold US Assets if You Claim an Expat Tax Exemption 

While Americans are often well aware of their never-ending filing requirements based on citizenship and not residency, US citizens do have a few privileges that others do not.

The absence of a formal ‘tax non-resident’ status in the US allows anyone, including US citizens, to hold US bank accounts without necessarily triggering tax liabilities.

While Australians, Canadians and Brits, in particular, are usually well-advised to move their banking offshore, Americans can continue to bank in their home country.

Furthermore, US citizens can own US real estate, including personal residences, without jeopardising their expat tax status.

In general, the US tax system for expats is based less on ‘intent’ and more on ‘physical presence’ compared to other developed countries. 

This means that as long as your physical presence is mostly outside of the United States and, in some cases, inside another country, you can continue to hold US assets like bank accounts and property.

The same principle is true for those renouncing US citizenship.

There are plenty of former US citizens who maintain US bank accounts and credit cards, and many still own property there. 

While US citizens enjoy special tax breaks when selling real estate, there’s absolutely nothing prohibiting non-citizens from doing business in the United States. Quite the contrary, actually.

The US is home to plenty of foreign investment and you can continue to invest there even if you give up your stateside nationality.

After all, the United States is the world’s largest tax haven and it certainly wouldn’t be if every Chinese guy with a bank account in New York had to pay US taxes.

Tax for Expats Myth #5: A US Person Cannot Open Offshore Bank Accounts

In the FATCA era, some people believe that US persons cannot open bank accounts offshore. 

And, of course, this is not true. 

It’s a myth that’s often used by people in this business who want to make offshore sound super scary and difficult. 

It’s also used by ‌people who love to diss the US government. And that’s partly a fair point – citizenship-based taxation and FATCA are certainly unfair, but it is what it is.

Instead, it’s recommended to go where you’re treated best, which means that you need to find the best way to legally make your own path. 

And rest assured that there are plenty of banks that will accept US citizens. 

While some banks, particularly in Switzerland, Liechtenstein and parts of the EU, have restricted access for US citizens, many others, especially in emerging markets and financial hubs like Singapore, continue to accept American clients.

Sometimes, they will limit the activities you can do. For example, you won’t be able to open a full-throttle investment account, or you won’t be able to hold certain insurance products.

You might only be able to open a generic savings account or run-of-the-mill transactional account. But you’ll still have plenty of options in many different countries. 

Nomad Capitalist keeps a regularly updated list of over a thousand banks that will take American clients.

After all, going where you’re treated best does not mean crying over the ones that won’t take you. It simply means finding the ones that will.

Tax for Expats Myth #6: You Don’t Need to File Taxes if You Live Overseas

You may have heard about the ‘Nomad Tax Trap’, which references how many digital nomads have simply left their home countries without filing a departure form and expect never to be taxed as they roam the globe. 

For citizens of many countries, this could lead to an audit and possible tax penalties. 

US citizens are required to file a tax return annually, no matter where they live. 

This includes all of their worldwide income, all of their assets and things like bank accounts overseas. You’ll have to report all that and will be liable for any tax that might be due.

This is the single biggest downside of being an American – citizenship-based taxation. 

For example, if you’re from the United States but live in tax-free Monaco and have an investment property in Dubai that generates rental income, Dubai and Monaco may not tax you, but the United States certainly will. 

This myth is also a major point of confusion when it comes to renouncing US citizenship. Just getting up and leaving isn’t enough to sever your ties with the system. You will need to officially renounce, which includes reporting all of your assets (worldwide) on Form 8854 – the expatriation return. 

Basically, the IRS wants to get all up in your business before you get out of their ‘system’. 

But back to filing the annual tax. 

You’re definitely going to want a tax preparer to help you, especially if you want to claim the Foreign Earned Income Exclusion (FEIE). 

Another misconception is that claiming the FEIE and owing no tax eliminates the need to file a return. However, the FEIE must be explicitly claimed on your tax return.

If you don’t and then come back a few years later saying that you meant to claim it, that may not work. The IRS certainly won’t always entertain such requests.

Even if you don’t owe anything, you will still have to file.

Tax for Expats Myth 7: You Have to Live in One Place Overseas

Another prevalent myth suggests that US expats must establish residency in a single foreign country to claim tax exemptions. However, this is not the case.

The key requirement is simply to spend the majority of your time outside the US, regardless of your specific location or ties to any particular country. This allows you to use the Physical Presence Test, the simplest way to qualify for tax exemptions. 

By meeting the Physical Presence Test, you can exempt a significant portion of your earned income from US taxes. With proper business structuring, you may even achieve a zero-tax liability.

While it’s possible to get a few extra perks by having a single ‘bona fide residence’ in a foreign country and living there most of the time, most US expats don’t want or need those extra perks.

In fact, the United States is one of the friendlier developed countries for digital nomads. 

As draconian as US tax law is, you don’t need to prove your intent to leave the country or pass a tax domicile test as in other developed countries. 

All you need to do is be physically located somewhere else. 

However, this doesn’t work if you’re based in international waters. You have to be present in another country.

Tax for Expats Myth #8: You Can’t Fix Expat Tax Errors

Despite the availability of tax breaks like the Foreign Earned Income Exclusion, many expats and nomads mistakenly believe they don’t qualify for these exemptions. 

For instance, one of our clients, who primarily resides in Europe, had previously overpaid nearly US$80,000 in US taxes in 2018 alone, despite qualifying for exemptions that would have eliminated his tax liability.

The worst part was that he didn’t owe anything; he paid US$80,000 more than was legally required. 

And, as you might know, the IRS does not police tax returns for taxpayer overpayments. You will have to proactively seek to fix your own tax errors so as not to leave any of your money on the table.

This is why we recommend working with an expat-focused US tax preparer. Not only do you need someone knowledgeable in US tax law to create your offshore structure, but also someone knowledgeable in international tax to file your annual returns.

There’s a whole network of expat-focused tax preparers available to Nomad Capitalist clients. 

The good news is that past tax returns can be amended to correct errors and claim refunds for overpayments.

A good accountant can review your past returns and find any errors or overpayments that can be corrected. Depending on how you filed and paid, the IRS may have to issue you a paper cheque in the mail, but you will get any overpayments refunded eventually.

Tax for Expats Myth #9: The IRS is Out to Get You

The IRS is an organisation that’s often feared, especially when it comes to ‘non-standard’ situations such as offshoring and expat tax. 

If you’re doing things properly to begin with – if you have the right structure in place and have set up your affairs properly – you have nothing to worry about. 

What should you do if they contact you? Freak out and run for the hills?

Certainly not. 

It’s not the end of the world if you get asked any questions. 

Most often, it’s just a matter of explaining some part of your business or personal affairs. 

We recommend obtaining a memorandum that explains the structure you have set up or the way you have organised your offshore affairs. 

Get assistance with this and put everything in writing. Then, keep it safely stored in your files in case it is ever needed. 

Sure, it’s going to cost you a little more to have the proper tax professionals to get everything done right for you, but it’s definitely worth it. 

Imagine getting that knock on the door and then simply having to say: ‘Here is what I’m doing and why I’m doing it’.

It will sometimes take additional paperwork, but the issue may just resolve itself without much fanfare.

And whatever you do, don’t just set up your business structure via cheapoffshorecompanies.ru or some other non-legitimate-looking website and expect that everything will be OK. 

The IRS, for one, certainly won’t love that if any issues arise. 

What If You’re Late on Taxes as an Expat?

If you’ve been fooled by one of these expat tax myths, there’s a good chance you might have missed a tax filing deadline, too. 

For expats that have fallen behind on US taxes, you may be able to catch up without penalties through the Streamlined Filing Compliance Procedures. This IRS amnesty program is designed for taxpayers who unintentionally failed to file. 

To qualify, you need to certify that your oversight was not willful, submit the last three years of overdue tax returns, pay any taxes owed with interest and file Foreign Bank Account Reports (FBARs) for the past six years. 

Following these steps typically brings you back into compliance.

If you’ve already filed but made an error, you can correct it by submitting an amended return using Form 1040-X. 

This allows you to report unclaimed income or missed deductions, ensuring your tax filings are accurate and up to date. 

Other Reporting Requirements and Tax Tips for Expats

As we’ve mentioned, filing tax returns as a US expat can be complicated. This is because expats have additional tax reporting requirements beyond simply filing a US tax return. 

If the combined balance of your foreign bank accounts exceeds US$10,000 at any point during the year, you must file a Foreign Bank Account Report (FBAR) using FinCEN Form 114. 

This includes personal accounts, pensions, investments, and accounts for which you have signature authority. 

Under FATCA, expats with foreign assets exceeding certain thresholds must file Form 8938. These requirements are separate, and some expats may need to file both. 

Expats also face unique tax considerations, including Social Security and retirement benefits, real estate sales, and self-employment taxes. 

US citizens can still collect Social Security while living abroad, except in restricted countries like Cuba and North Korea. Totalisation agreements with 28 countries help prevent double taxation on Social Security contributions. 

Expats who own businesses must pay a self-employment tax of 15.3%, which is not offset by the FEIE or Foreign Tax Credit (FTC). 

If you’re a digital nomad, you also need to follow the same tax rules as other expats. However, your lack of a fixed domicile can create some extra complexities. 

9 Debunked US Expat Tax Myths: FAQs

Optimising Taxes for US Expats 

There are a lot of myths surrounding the offshore world, but it’s not as scary as it seems once you learn how to navigate it. Still, it helps to have some expert assistance to help you separate facts from fiction.  

Nomad Capitalist has helped thousands of wealthy entrepreneurs and investors to go where they’re treated best by pairing them with experts in tax, investment strategy, asset protection and immigration. 

Whether you’re looking to move your assets overseas or transport your family to a new tax-friendly country, we can help. Click to discover more about our holistic Nomad Capitalist plans.