There are many reasons that US citizens living abroad may still owe taxes to the IRS. Here are a few of the most common ones.
Self employment income
If you are an independent contractor or otherwise run your own business, you generally have to pay self-employment tax – that’s taxes for Social Security and Medicare – on your net business profit (income remaining after expenses).
Self-employment tax is 15.3% on 92.35% of your net profit. So if your profit was $50,000, you pay tax on $46,175, which comes out to $7,065. (This calculation will change if your net profit plus wages from US employers is greater than $160,200, since above that threshold you’re only paying Medicare and not Social Security).
If you live in one of the 30 countries that has a totalization agreement with the U.S. Social Security Administration, you may be exempt from paying this tax, generally because you are contributing to that country’s social security system instead. (Mexico is not one of those countries).
Investment income
Investment income – which includes interest, dividends, and net profit from selling property stocks – is not considered earned income and therefore cannot be excluded using the foreign earned income exclusion. (If the income is foreign and you paid taxes in another country, you may be able to use the foreign tax credit to offset US tax liability.)
Rental income
Like investment income, rental income is generally not considered earned income and therefore cannot be excluded with the FEIE.
US source income
Any income for work earned while physically in the US (even on a short business trip), or income from property located in the US, is generally considered US source income and subject to US taxes. If you also owe taxes on that income in your country of residence, you may be able to claim a credit for taxes paid to the US.
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