Moving abroad with kids? Tax tips for American families living overseas

Relocating abroad with your family can be an exciting adventure, offering new experiences and opportunities. However, as an American citizen, your tax obligations don’t disappear when you leave the US.

The IRS still requires you to report your worldwide income, and there are specific tax considerations for families living overseas. Here’s what you need to know to stay compliant while making the most of available tax benefits.

1. You Still Need to File US Taxes

The US is one of the few countries that taxes based on citizenship rather than residency. This means that even if you live abroad, you must file a US tax return if your income exceeds the standard filing threshold. This includes wages, self-employment income, rental income, and even foreign government benefits.

2. The Foreign Earned Income Exclusion (FEIE) Can Reduce Your Taxable Income

If you work while living abroad, you may be able to exclude up to $126,500 (for tax year 2024) of your foreign earnings from US taxation using the Foreign Earned Income Exclusion (FEIE). To qualify, you must meet one of these tests:

• Bona Fide Residence Test – You are a tax resident of another country for an entire calendar year.
• Physical Presence Test – You are physically present in a foreign country for at least 330 days in a 12-month period.

3. Claim the Foreign Tax Credit to Avoid Double Taxation

If you pay income taxes to a foreign country, you may be eligible for the Foreign Tax Credit (FTC). This credit helps offset your US tax liability, ensuring you’re not taxed twice on the same income. This is especially useful for families living in high-tax countries.

4. You May Still Qualify for the Child Tax Credit

The Child Tax Credit (CTC) is available to US expats, but eligibility depends on how income is reported. If you claim the FEIE, you cannot receive the refundable portion of the credit. However, if you use the FTC instead, you may still qualify for a refundable credit of up to $1,700 per child (for tax year 2024).

To be eligible, your child must be a US citizen or resident, have a Social Security Number, and live with you for at least half the year. Additionally, your earned income must meet the $2,500 minimum threshold to claim the refundable portion. If your income is too high to qualify for a refund, you may still receive a non-refundable credit to reduce your tax liability. Choosing between FEIE and FTC is crucial in maximizing your Child Tax Credit benefits.

5. Reporting Foreign Bank Accounts and Investments

If you have a foreign bank account with a balance exceeding $10,000 at any time during the year, you must file an FBAR (Foreign Bank Account Report). Additionally, if you hold foreign financial assets above certain thresholds, you may need to file Form 8938 (FATCA report) with your tax return.

6. Plan for State Tax Obligations

Even if you move abroad, some US states (like California, New Mexico, and Virginia) may still consider you a tax resident unless you take specific steps to sever ties. Be sure to check your state’s rules to avoid unexpected tax bills.

7. Seek Professional Tax Help

US expat tax rules can be complex, especially for families. Working with a tax professional specializing in US expatriate taxation can help ensure compliance while maximizing available credits and deductions.

Moving abroad with kids brings many challenges, but with proper tax planning, you can avoid pitfalls and take advantage of expat tax benefits. Make sure you stay compliant with US tax laws while optimizing your finances for your family’s new life overseas.