Expatriate (Expat): Definition and Pros/Cons of Living Abroad (2024)

What Is an Expatriate?

An expatriate or expat is an individual living and/or working in a country other than their country of citizenship. The arrangement is often temporary and for work reasons. An expatriate can also be an individual who has relinquished citizenship in their home country to become a citizen of another.

Understanding Expatriates

An expatriate is a migrant worker who is a professional or skilled in their profession. The worker takes a position outside their home country, either independently or as a work assignment. The employer assigning the work can be a company, university, government, or non-governmental organization.

You would be considered an expatriate or "expat" after you arrive in Toronto if your employer sends you from your job in its Silicon Valley office to work for an extended period in its Toronto office.

Expats usually earn more than they would at home and more than local employees. Businesses also sometimes give their expatriate employees benefits such as relocation assistance and housing allowances. The expat will have to open a local bank account that will allow them to function in their new home.

Living as an expatriate can be exciting. It can present an excellent opportunity for career advancement and global business exposure but it can also be an emotionally difficult transition. It involves separation from friends and family while adjusting to an unfamiliar culture and work environment. This is typically the reason behind the higher compensation offered to these migrant workers.

Special Considerations: Retiring Abroad

Much expatriation occurs during retirement. Most Americans spend their retirement in the U.S. but a growing number are opting to retire overseas. People are motivated to relocate abroad at an older age for several reasons, including lower cost of living, better climate, access to beaches, or other reasons. But it can be tricky to navigate taxes, long-stay visas, and the language and cultural differences experienced when settling down in other countries.

Popular retirement destinations include countries in Central and South America, the Mediterranean, and parts of Europe.

A common choice a retiree expat must deal with is between permanent residency and dual citizenship. Neither dual citizenship nor residency will get you out of filing a U.S.tax returnevery year.

You may also have to file an income tax return in your country of residence although most deduct the amount American residents pay to the U.S. via treaties that minimize double taxation.

You face a tough decision that will require some soul searching and research if you're a retiree or near-retiree who's on the fence. You might consider a trip abroad or maybe several to test the waters before you make a decision. Some Social Security benefits might travel abroad with you but you may have to forego benefits like Supplemental Security Income (SSI).

Foreign Earned Income Exclusion

Complying with United States income tax regulations is an added challenge and financial burden for Americans working abroad as expatriates because the U.S. taxes its citizens on income that's earned abroad. But the U.S. tax code contains provisions that help to reduce tax liability and avoid double taxation. Taxes paid in a foreign country can be used as a tax credit in the U.S. which reduces the expat's tax bill when applied against it.

The Foreign Earned Income Exclusion (FEIE) allows expats to exclude a certain amount of their foreign income from their tax returns. The amount is indexed to inflation. It was $120,000 in 2023 and it increased to $126,500 in 2024. An expat who earns $180,000 in 2024 from their job in a foreign country that's tax-free would only have to pay U.S. federal income tax on $53,500: $180,000 minus $126,500.

Foreign Tax Credit

The FEIE doesn't apply to rental or investment income. Any income earned from interest or capital gains from investments must be reported to the IRS. The Foreign Tax Credit (FTC) is a provision that ensures that expats aren't double-taxed on their capital gains.

Assume an expat falls in the 35% income tax bracket in the U.S. Their long-term capital gain on any investment is taxed at 15%. The FTC provides a dollar-for-dollar credit against taxes paid to a foreign country so the expat would only have to pay 5% tax to the U.S. if they paid 10% tax to the country where they work. They’d owe the full 15% tax to the U.S. government if they paid no tax to the foreign country.

The expat would forfeit that amount if the income tax paid to a foreign government far exceeds the amount of the credit because the foreign tax rate far exceeded the U.S. rate. The credit can be carried to future years, however.

Expatriation Tax

An individual who has renounced their citizenship in their home country and moved to another is also referred to as an expatriate for tax purposes. They're subject to an exit tax known as an expatriation tax.

The expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their U.S. residency if one of the principal purposes of the action is the avoidance of U.S. taxes, according to the Internal Revenue Service (IRS).

This emigration tax applies to individuals who:

• Have a net worth of at least $2 million on the date of expatriation or termination of residency
• Have an average annual net income tax liability over the five years ending before the date of expatriation or termination of residency that is more than $190,000 if the expatriation date was in 2023 or $201,000 if the expatriation date is in 2024
• Do not (or cannot) certify five years of U.S. tax compliance for the five years preceding the date of their expatriation or termination of residency

Advantages and Disadvantages of Becoming an Expatriate

Living and working in another country for an extended period can have its benefits. They can range from new experiences and adventure to more practical considerations like a lower cost of living or being closer to extended family abroad. You may also get government perks like free healthcare and education and more favorable taxation depending on where you settle.

There are also some potential drawbacks. You'll still have to file tax returns each year and may have to pay taxes to Uncle Sam even on income earned in your new country unless you fully relinquish your American citizenship.

You might also be a long way from home. This can make seeing friends and family more costly and difficult and time zone differences can also interfere with finding a good time to link up by phone or video chat. Learning a new language and customs can also be difficult for some and certain items or products that you like may not be available in the country to which you move. And not all countries enjoy the same level of political and economic stability that the U.S. does.

The Bottom Line

Expats must typically navigate a complex web of tax rules and regulations that can be challenging to understand and comply with. There are retirement considerations to comply with. U.S. Federal taxes are complicated although you can rely on tax credits and income exclusions to receive favorable U.S. tax treatment. Think it all through before you make a decisive move.