As a US citizen living and working abroad—such as in Thailand—you remain subject to US tax obligations due to the United States’ unique citizenship-based taxation system. This means the IRS expects you to report your worldwide income, including foreign earnings, regardless of where you live or work. However, there are mechanisms to reduce or eliminate double taxation on income earned abroad, like in Thailand. Here’s how it works as of February 19, 2025, based on current tax rules:
General Rule: Worldwide Income Taxation
- Who’s Affected: All US citizens and resident aliens (e.g., Green Card holders) must file a federal income tax return annually, reporting income from all sources—US and foreign—unless their income falls below the filing threshold (e.g., $13,850 for single filers under 65 in 2023; this adjusts yearly for inflation).
- Foreign Income: This includes wages, self-employment income, investment income (e.g., interest, dividends), and other earnings from Thailand or elsewhere. You report this on Form 1040, just like domestic income.
Key Tools to Avoid Double Taxation
The US provides two primary relief options to prevent you from being taxed twice—once by Thailand on income earned there and again by the US:
- Foreign Earned Income Exclusion (FEIE):
- What It Does: Allows you to exclude a portion of your foreign-earned income from US taxation.
- 2024 Amount: For tax year 2024, the exclusion is $126,500 (adjusted annually for inflation; expect a slight increase for 2025, likely around $130,000, though the IRS hasn’t finalized 2025 figures yet).
- Eligibility:
- You must be a US citizen or resident alien.
- You must have a tax home in a foreign country (i.e., your main place of work or business is abroad).
- You must meet either the Physical Presence Test (330 full days abroad in any 12-month period) or the Bona Fide Residence Test (living abroad for an uninterrupted period that includes an entire tax year, typically January 1 to December 31, with intent to stay).
- How to Claim: File Form 2555 with your tax return. Only “earned income” (e.g., wages, salaries) qualifies—passive income like dividends or capital gains doesn’t.
- Example: If you earn $100,000 working in Thailand in 2025 and meet the Physical Presence Test, you can exclude all $100,000 from US taxable income, assuming the 2025 FEIE limit exceeds that amount.
- Foreign Tax Credit (FTC):
- What It Does: Gives you a dollar-for-dollar credit against your US tax liability for income taxes paid to Thailand.
- Eligibility: Applies to foreign income taxes paid on income that’s also taxable in the US (e.g., income above the FEIE limit or unearned income like interest).
- How to Claim: File Form 1116. You can’t claim a credit for taxes paid on income excluded via FEIE, so you choose between FEIE and FTC for earned income (FTC often makes sense if Thailand’s tax rate exceeds the US rate).
- Example: If you earn $150,000 in Thailand, exclude $130,000 (assuming 2025 FEIE), and pay $5,000 in Thai tax on the remaining $20,000, you can credit that $5,000 against US tax owed on the $20,000.
Thailand-Specific Tax Context
- Thai Income Tax: Thailand taxes residents (those staying 180+ days per year) on income earned in Thailand at progressive rates from 0% to 35%. For example, income up to 150,000 THB ($4,500 USD) is exempt, while income over 5 million THB ($150,000 USD) is taxed at 35%. Non-residents are taxed only on Thai-sourced income at a flat 15% withheld at source (e.g., for freelance work), but this doesn’t typically apply to work permit holders.
- US-Thailand Tax Treaty: There’s no comprehensive income tax treaty between the US and Thailand to automatically avoid double taxation (unlike with many European countries). This makes FEIE and FTC your primary tools.
Other Considerations
- Self-Employment: If you’re self-employed in Thailand (e.g., freelancing with a work permit), you’ll also owe US self-employment tax (15.3% for Social Security and Medicare) on net earnings, unless excluded via FEIE. Thailand may also impose taxes, requiring careful planning.
- State Taxes: Some US states tax foreign income too. If you maintain residency in a state like California while abroad, you might owe state taxes unless you sever ties (e.g., no home or driver’s license there).
- Foreign Bank Account Reporting (FBAR): If your Thai bank accounts (or other foreign financial assets) exceed $10,000 in aggregate at any point during the year, you must file FinCEN Form 114 annually with the Treasury Department (separate from your tax return).
- FATCA: Under the Foreign Account Tax Compliance Act, you may need to report foreign accounts to the IRS on Form 8938 if they exceed certain thresholds (e.g., $50,000 for single filers living abroad).
Practical Example
- Scenario: You earn $80,000 USD working in Thailand in 2025, spend 330+ days there, and pay $10,000 in Thai income tax.
- US Tax:
- With FEIE, you exclude $80,000 (assuming it’s below the 2025 limit), so your US taxable income is $0. No US tax owed on this income.
- You don’t claim FTC since the income is excluded, and the $10,000 Thai tax is simply a cost of working there.
- Caveat: If you earn an additional $20,000 in investment income from Thailand, you’d owe US tax on that (since FEIE doesn’t apply), but could claim FTC for any Thai tax paid on it.
Planning Tips
- Maximize FEIE: Spend enough time abroad to qualify—leaving Thailand for extended US visits could disqualify you from the Physical Presence Test.
- Track Thai Taxes: Keep records of taxes paid to Thailand for FTC claims if needed.
As of now (February 19, 2025), these rules align with IRS guidance up to 2024, with no major legislative changes announced for 2025 yet. Contact Gooding CPA for your unique situation to get the best tax strategy.