us expat tax guide – united arab emirates
US Tax Help When
You’re Living In The UAE
The United Arab Emirates (UAE) is widely recognized as the Middle East’s hub for finance and business, attracting a flourishing expatriate community. Approximately 88% of the UAE’s population consists of expatriates from various nations, making it a diverse and vibrant society. Notably, many American expats have chosen Dubai as their home.
Aya, a UAE registered tax agent, delves into the subject of taxation for US expats residing in the UAE.
Do I have to file a tax return?
Expat tax can be challenging to navigate, no matter what part of the world you are in. A lot of United States (US) citizens and permanent residents are often uncertain about their tax filing obligations with the Internal Revenue Service (IRS). Most are not even aware that they need to file at all when they earn income from outside the United States.
So, who is required to file a tax return with the IRS?
US citizens and green card holders are taxed on their worldwide income, even if they are not living in the US. For example, if you are a US citizen or green card holder living in the United Arab Emirates (UAE) and earning income there, you will have to report that income to the IRS.
If the US person earns a salary from the UAE and additional interest income from the US, they would still have to report both their UAE salary and their interest income. The filing requirements and obligations for your tax return will primarily hinge on your filing status and income thresholds as defined by the IRS. In essence, understanding these crucial factors is crucial to ensuring that you comply with the tax laws and avoid any penalties.
A single person has an income threshold of $12,950, whereas the threshold for a married couple filing jointly is above $25,000. And surprisingly, the income threshold for a married US citizen or green card holder filing a separate tax status would be $5.
Head of Household filing status
The head of household (HOH) filing status refers to the status designated by the Internal Revenue Service (IRS) for households where the parents are not married. The IRS typically provides this status to individuals who have never been married and those who are divorced or legally separated. However, not all unmarried United States (US) citizens or green card holders automatically become eligible for the head of household filing status.
For you to be eligible to use the “head of household” filing status, you need to have qualifying dependents. These qualifying dependents could be your son, daughter, parent, or another relative. This classification often varies with each situation.
You must also contribute more than 50% of the household expenses required by your dependent or qualifying choice. For example, let us say we have a single person with a dependent who is a US citizen. The dependent is three years old, and the head of household is providing this dependent with 50% of the financial support they need. That person would then be eligible to claim head of household filing status.
Another example we see a lot of, especially in the United Arab Emirates (UAE), is that some US citizens are married to non-resident aliens, which means non-US individuals. Under the IRS rules and regulations, a US person who is married to a non-US person is considered unmarried. This means that they can claim head of household filing status on the basis that they have a dependent or qualifying child, and are providing more than 50% of the financial support for that individual.
Some factors may result in the IRS denying your head of household filing status. These could include the age of your qualifying child and the amount of time they have lived with you. If your qualifying dependent is a relative with an income of their own, how much they earn could disqualify you for head of household filing status. Similarly, your dependent cannot be claimed as a qualifying person by another taxpayer.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
Do I have to pay taxes?
Taxation is the backbone of almost every country’s economic system. It is how our government can afford to pay for public goods and services. In fact, the International Monetary Fund (ITF) describes taxation as:
“The only practical means of raising revenue to finance government spending on the goods and services that most of us demand.”
It is no surprise, then, that most people assume that they do not need to pay taxes in their home country when they move abroad. A lot of United States (US) expats often wonder if they have to pay taxes when they live in or earn income from a different country.
So, do you have to pay taxes as a US expat?
The answer really depends on several factors, including your income. Whether or not you pay taxes will depend on your tax situation. Let us take the example of a US citizen or green card holder living in the United Arab Emirates (UAE) and earning $100,000. This person has established residency in the UAE, and they have a foreign-earned income of $100,000 in a tax year.
For the 2023 tax year, the Foreign Earned Income Exclusion is $120,000. So, the US person would get fully excluded on the basis that they qualify for the foreign earned income exclusion because of their $100,000 income. As a result, this US person would end up with zero taxable income.
The Foreign Earned Income Exclusion does not mean that your income must not be reported to the Internal Revenue Service (IRS). You would still have to file a US tax return every tax year, even if you do not have any taxes to pay.
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AM I ELIGIBLE FOR FOREIGN EARNED INCOME EXCLUSION? Learn from Tanveer Mannan, a highly experienced IRS Enrolled Agent based in Dubai. Having worked at EY and PWC before joining EXPAT US TAX, Tanveer has 15 years’ experience of helping Americans get the correct advice when they come to work in UAE. Getting the correct tax […]