Navigating expat taxes can be a daunting challenge, especially for female entrepreneurs and digital nomads.
We sat down with Mary Milner, the inspiring founder of Matriarch Tax & Advisory and a Certified Public Accountant. Mary is a mission-driven mompreneur empowering US expats to grow their businesses abroad.
Whether you're an established entrepreneur or a digital nomad just starting out, this interview is packed with valuable advice to help you achieve financial independence and success.
Can you tell us about your journey as a CPA specializing in expat taxes and your motivation behind founding Matriarch Tax & Advisory?
My journey as a CPA has been a winding path and I’m what many would consider a “career-changer” because my first degree was in Sociology and I worked for many years in sales, marketing, and customer relationship management. However, I continually found myself drawn to the financial side of the business in the few places I worked, and realized as I grew and matured that I was being called to the field of accounting.
It took many years of fortitude to obtain a second bachelor’s degree in accounting and pass the CPA exam in the years where I had many personal changes (got married, became a stepmom, became a mom to two boys close in age) but I was finally able to achieve my goals and make that leap, and I landed in the world of tax.
I am drawn to assisting expats because at my core, I share the values that many expats have of adventure, discovery, and blazing your own independent path for life. I have a deep personal affinity for travel and exposure to the world from different settings and cultures. It has led me to experiences like dancing in the Macy’s Day Thanksgiving parade just after 9/11, golfing at St Andrews in Scotland, turning 17 in Istanbul, walking the path in Pompeii and Herculaneum, gazing in awe at the Sistine Chapel, and moving over 20 times as an adult.
I know how easy it is to get that “bug” and suddenly have the intense urge to expatriate from your home and imagine a new life for yourself, wherever that may be.
What inspired you to focus on helping female expats specifically, and how does your firm promote female empowerment in the realm of tax advisory?
The accounting and tax world is very male dominated. For as long as I can remember, I’ve been a feminist with a strong sense of fairness and morality when it comes to gender treatment as a whole, but in particular in financial matters.
We live in a time that is not far removed from an age when a woman could not apply for her own mortgage or credit card without a husband or father to co-sign, and facts such as these fuel this passion that I have for women being able to confidently handle their own financial and tax matters. It is so vital for independence and equity in life.
For me personally, there are certain professionals that I would only seek out a female practitioner because I want to be seen and understood in an impactful way and work with someone who communicates in a similar manner as I do. So, I want to make sure my firm welcomes any female expats that desire a working relationship that places a high value on communication, mutual respect, and transparency.
As a society, we should be way past a world where women are mansplained to on financial matters, but unfortunately that’s not always the case. So I’m doing my little part to create a welcoming, holistic, female-friendly environment where you can better understand and manage your US taxes as an expat. Having said that, I do not exclude any gender and have worked with many wonderful clients of all genders. I simply ensure that Matriarch's values and practices are as female-friendly as can be.
What are some common challenges that female expats face when it comes to managing their taxes, and how does your firm address these challenges?
A female expat, like any expat, faces challenges in the stress they manage over filing taxes in two countries and worrying they may pay more than they should. However, female expats may desire working with a tax professional that can speak with them, instead of at them, about their unique tax situation using a communicative, understanding, and friendly approach.
It can be a challenge to find that in a tax professional, especially if the female expat appreciates working with other women. Additionally, expat tax is a specialized area, so the field is even more narrow than the accounting and tax world itself, which is already male-dominated, so it may be challenging to find the right woman for the job.
Women are well-known for working in a more collaborative fashion in a professional setting, and that’s exactly what I aim to do with my expat clients. In fact, I recently read a study showing that women treated by female doctors were less likely to die or be readmitted to a hospital than if they were treated by a male doctor, and the researchers attributed this to improved communication and understanding between women.
Of course, taxes are not life and death, but managing taxes (often in more than one country for expats) is often a point of stress… so why not work with someone that you communicate and collaborate well with.
Could you explain the concept of excluding income from US tax as a digital nomad and share some strategies for achieving this?
Absolutely, and I’m glad you asked because this is an important topic. As a US expat, you have two main options to reduce your US tax liability. You can use the Foreign Tax Credit to use the foreign taxes you've paid as an offset to US taxes. Alternatively, you can use the Foreign Earned Income Exclusion to exclude some or all of your foreign earned income. At certain income levels, you can use a combination of both (with careful application).
For 2024, you are eligible to exclude up to $126,500 of foreign earned income under the Foreign Earned Income Exclusion if you pass one of two tests: the Bona Fide Residence Test or the Physical Presence Test.
To meet the Bona Fide Resident Test, "you must be a U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1–December 31, if you file a calendar year return)..." You'll see this test used for those expats who have permanently moved to another country and remained for years, often becoming a citizen or permanent resident of that country, and filing and paying taxes each year.
Another way to use the Foreign Earned Income Exclusion is to meet the Physical Presence Test. For this, "you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries, for at least 330 full days during any period of 12 months in a row." To achieve 330 days in a foreign country you'll have to spend 35 days or less in the US, so tracking your travel dates proactively is key if you want to exclude your income. Also, it's important to note that the Physical Presence Test does not require that you remain in one foreign country for 330 days, so this is often what digital nomads use.
For example, an expat that has moved to Costa Rica may also be taking long weekends and trips across Central America and South America to explore and adventure, and as long as you have established a tax home outside the US and track your travel and location in each foreign country for the year, you could use the Physical Presence Test to claim the Foreign Earned Income Exclusion and exclude up to $126,500 of your income from US tax (even if you're working for a US company that pays you on a W-2 because this test is about your actual physical location).
The application of the Physical Presence Test can become more complicated in the year that an expat moves out of or returns to the US because it allows for a prorated amount of exclusion to be used. Specifically, the 12-month period on which the Physical Presence Test is based must include 365 days, part of which must be in the current tax year. However, and importantly, the dates may begin or end in a calendar year other than the current tax year. So, for a simple example, if you move to Bali in July 2023 and remain outside the US until July 2024, you can claim roughly 50% of the Foreign Earned Income Exclusion because you were outside the US for roughly 50% of the year.
For any expats that may read this, if you've recently moved and your residency outside the US has not yet encompassed a full year, I recommend working with a tax professional that can run those calculations of days to determine that amount of exclusion you're eligible for and save you as much tax as possible.
Double taxation can be a concern for many expatriates. What advice do you have for individuals who find themselves in a situation where they have to file taxes in two countries?
A common misconception is that filing in two countries automatically means paying double tax, when in reality the majority of expats I have helped over the years pay little to nothing in US taxes. But there are steps required that must be done by a tax professional with knowledge in expat tax, in order to achieve that result.
One of the simplest and best ways to avoid double taxation is to use the Foreign Tax Credit. For US tax purposes, the Foreign Tax Credit allows you to offset your US tax on foreign income by the amount of income taxes you’ve already paid or accrued in a foreign country.
I’ll illustrate with a simplified example. Let’s say I am an expat living and working in London. Each paycheck, my employer withholds PAYE. Each year, I file a UK tax return to HMRC. Assuming my UK salary is $33k, I’ve had roughly $3k of income taxes withheld throughout the year. So, when I file my US tax return, I’ll report my $33k in salary and include the $3k of UK taxes paid on Form 1116, which will calculate a Foreign Tax Credit on my US return. Since my $33k of taxable income on the US return creates roughly $2k of US tax for me, I completely offset that $2k of US tax by the $3k of UK taxes I’ve paid, and the remaining $1k of UK taxes paid because a Foreign Tax Credit carryover that I can use for up to 10 years.
Now, let’s suppose I decide to move back to the US for a year, then move to Abu Dhabi where I’ve found a new job making a $40k salary. Since the UAE does not impose income tax on me, I only need to pay US taxes. Since I haven’t been in the UAE long enough to claim the Foreign Earned Income Exclusion, I am fully responsible for the $3k in US taxes on my $40k salary. Fortunately, I have that $1k of Foreign Tax Credit carryovers from two years ago, and I include Form 1116 to claim that, and reduce my US tax bill down from $3k to $2k.
Most of the situations I assist expats with are much more complex than this example, but it’s important to remember there are a variety of ways to file taxes in two countries and still minimize your taxes with credits and exclusions.
How do tax regulations differ for self-employment versus entrepreneurship, especially when operating within a foreign corporation? What should expats be aware of when navigating this transition?
Every country has its own legal and tax regulations on business operations and self-employed individuals, so one important first step for expats is to learn and follow the guidelines of their resident country.
Additionally, countries like the US require more comprehensive reporting for individuals with involvement in a foreign business or self-employment in a foreign country, which can often constitute additional reporting as a foreign branch or foreign disregarded entity. The information that the expat must report increases, as does the cost of compliance due to the additional complexities.
Another important topic in the realm of self-employment as an expat is self-employment tax. Most of the time when we talk about taxes, we’re speaking specifically about income tax. However, if you’re self-employed as a freelance, digital nomad, sole proprietor, or independent contractor, you not only pay income tax on your earnings but you are also responsible for self-employment tax on your net earnings. Self employment tax is roughly 15%, and you’re responsible for that in addition to income tax even if you don’t live in the US.
Also, the Foreign Tax Credit and Foreign Earned Income Exclusion do NOT reduce self-employment tax. However, if you live in one of the countries with a Totalization Agreement in place with the US, you may be exempt from US social security tax (self-employment tax) if you have coverage under your resident country’s social security system. This often occurs when you’ve lived outside the US for many years, and can provide great tax benefits for you each year.
Are there any common misconceptions about expat taxes that you often encounter in your work? How do you address these misconceptions with your clients?
The most common misconception is that you don’t have to file US taxes anymore once you move abroad as long as your income is under $126,500 per year. People frequently confuse the ability to exclude up to $126,500 of income using the Foreign Earned Income Exclusion with the need to file. In order to obtain that exclusion of your income, you must actually file an accurate return and claim the exclusion by filing Form 2555. Then, and only then, can you potentially pay $0 tax to the IRS.
This misconception is so painful to see because it’s typically an expat who took some time to look into it when they moved abroad, but they just misunderstood the mechanics of how to achieve that exclusion of up to $126,500 of income. So, it’s not someone who was trying to shirk their tax responsibilities or cheat the system, they just had a good-faith misunderstanding of US tax laws and can end up in a scary situation when this has gone on for years.
Fortunately, there is an IRS program, called Streamlined Foreign Offshore Procedures, that allows expats in this situation to file delinquent returns without penalties so they can get caught up and in good standing with the IRS. This program can also be used if an expat had been filing, but the returns were incorrect (which I also see a lot!) because you can submit amended returns under this program to gain compliance with the IRS.
Another common misconception that I see is assuming that a tax-free benefit or non-taxable income in one country also results in it being tax-free or non-taxable in the other country. I see many retired expats struggle with this because over the years they have spent time working both in the US and a non-US foreign country, so they have pensions that are both US and foreign. As retirement plans often have tax benefits of some sort, pension income may be non-taxable in the foreign country but still taxed in the US, or vice versa. In a case like that, having an accumulation of Foreign Tax Credits can be very helpful on the US side of tax matters.
In your experience, what are some of the most overlooked deductions or credits that expatriates may qualify for when filing their US taxes?
One area that is frequently overlooked is the interplay between the Child Tax Credit and the Foreign Earned Income Exclusion vs Foreign Tax Credit. With the many new clients I have taken on, I have found that the Foreign Earned Income Exclusion is more widely used by expats who have either been filing on their own or have continued with their previous local accountant in the US.
Often, expats start or grow their family abroad, and at some point realize that they’re not receiving a Child Tax Credit like many of their friends and family members are. It’s often overlooked that using the Foreign Earned Income Exclusion to exclude all your foreign income from US tax ends up disqualifying you for the Child Tax Credit because the Child Tax Credit requires “earned income”.
However, using the Foreign Tax Credit to mitigate double taxation allows you to utilize the Child Tax Credit because the Foreign Tax Credit doesn’t reduce your income but instead reduces your tax. The end result with using either the Foreign Earned Income Exclusion or the Foreign Tax Credit may be $0 US income tax either way, but if you use the Foreign Tax Credit you may be able to receive a refundable Child Tax Credit and put cash in hand…whereas the Foreign Earned Income Exclusion does not allow for that. And while that amount changes each year, you’re usually talking about thousands of dollars in your pocket that you’re legally entitled to.
Can you provide some insights into the importance of tax planning for expatriates and how it can contribute to their long-term financial success?
Tax planning is important for expats because it’s proactive instead of reactive. When you’re managing tax consequences for more than one country, it’s beneficial to understand the tax implications of a certain action prior to engaging in it.
For example, if you sell your home in a foreign country, you need to know how much of the sale proceeds to hold back in savings, especially if you are liable for tax in both the foreign country where you’re currently living and the US. However, if you do tax planning with an expat tax professional, you can work with someone to confirm that foreign taxes paid in the foreign country will create a foreign tax credit you can claim on your US tax return, thereby saving you from needing to withhold enough tax to pay in two countries.
Alternatively, you may sell a home in a foreign country and pay no taxes in that country on the gain, but if a year later, you have a tax bill due to the IRS because the sale is taxable for US tax purposes, most people would prefer to know that ahead of time, or at the very least when the sale occurs, so that you’re not surprised the following year when you discover a shockingly large tax bill on the gain from the sale. Tax planning is a really helpful tool to avoid unnecessary stress in your life
Another great example where tax planning can be helpful is prior to moving from one country to another. There are many European countries with a tax rate higher than the US tax rates, and if you’re paying that higher tax in a foreign country, that allows your US taxes to be completely offset by utilizing the Foreign Tax Credit.
However, if you move from, for example, from Germany to Singapore or from London to Dubai, suddenly you have less or no foreign taxes and the Foreign Tax Credit cannot mitigate your US taxes. If this occurs, you’ll want to begin claiming the Foreign Earned Income Exclusion to lower your US taxes. However, if you have recently revoked the Foreign Earned Income Exclusion and cannot reclaim it again for five years, that’s definitely something you want to be fully aware of before you move to a lower tax jurisdiction.
When it comes to taxes, the tail should not wag the dog so to speak, and tax implications should not completely dictate your life choices. But when the potential liabilities are in the tens of thousands of dollars, it’s certainly an important factor to consider when an expat is making those big life choices like where to live.
What are some proactive steps that individuals can take to better manage their tax liabilities as expats, especially in light of changing regulations and global economic shifts?
The most important step is working with a professional that specializes in expat taxes, and more specifically finding one that provides services with a proactive approach with tax planning and discussion about personal and professional plans for your life.
I am all for DIY’ing whenever a person is able to, and I was one of those people who took pride and joy in filing my own family’s taxes long before I became an accountant. But there is such value in realizing when your personal circumstances gain an added layer of complexity and doing it yourself can actually cause more harm than good.
This is also true of working with a tax professional that does not work with expats often. I have seen SO many costly errors and mistakes over the years. There are over 70,000 pages of tax laws and regulations for the US alone, so tax professionals specialize the same way that doctors do. You may be worse off using a “generalist” tax professional from your home town in the same manner you’d be worse off going to a family doctor for brain surgery.
What are the potential consequences of not properly filing taxes as an expatriate, and how can individuals mitigate these risks?
The most obvious consequence is IRS penalties for failing to file accurate tax returns. And the variety and number of penalties are nauseating. There are late filing penalties, late payment penalties, underpayment penalties, and civil penalties.
The civil penalties in particular can be a high amount of $10,000 per form for certain international filings that may be required depending on a taxpayer’s situation, often having to do with foreign financial assets or foreign business activities.
Some lesser known consequences are state penalties if an expat has lingering state tax obligations, criminal exposure for willingly hiding foreign income or financial assets from the IRS, and revocation of a US citizen’s passport.
Looking ahead, what trends do you anticipate in the realm of expat taxes, and how do you envision your firm evolving to meet the evolving needs of expatriates in the future?
In the future, I see more and more Americans moving abroad to experience all the world has to offer, and I see the expat movement continuing its upward trajectory. In addition to growing my firm and clients base, I’d like to author a few e-books that outline some common errors and misconceptions for people to avoid as well as outline basic tax-saving strategies so that more expats feel empowered to understand their tax situation. I would also like to increase my network of expat specialists in other financial and business areas like banking, financial and retirement advisors, mortgage specialists, and attorneys so that I have a strong group of trusted resources for my clients all over the world.
Contact Mary and her team at Matriarch Tax & Advisory:
https://matriarch.tax/
https://linktr.ee/marymilner
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