Most expats do not pay taxes in the US as they can claim a tax break. Most of the times, expats can claim the Foreign Tax Credit or Foreign Earned Income Exclusion which reduces the US tax liability to nil. In order to demonstrate how the tax liability is reduced to nil, please find below an example:
- Dave lives as a US expat in the Netherlands.
- Dave receives $50,000 wages from company X in the Netherlands.
- Dave paid 40% Dutch taxes in the Netherlands, $20,000.
|Example 1: Foreign Earned Income Exclusion|
|Less: foreign earned income exclusion||$50,000 (max. 107,600)|
|US tax liability (over $0)||$0|
|Example 2: Foreign Tax Credit|
|US tax (over $50,000)||$15,000|
|Less: foreign tax credit||$15,000 (max. $20,000)|
|US tax liability||$0|