US tax for Expats, where no double taxation treaty exists (Vietnam)?

Question

This page states that:

If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.

The language makes me believe that no matter where I reside (directly referring to "no matter where I work", as I will work in the country where I reside, right?) I will have to pay US taxes. That is, even if I work and earn in Vietnam (I will have to reside in Vietnam to actually work there, right?), I will be, in principal and according to the definition, residing in Vietnam so I will be subject to US taxation.

Please help me find any flaw in this understanding. I have heard about the Foreign Income Deduction, but that contradicts with the statement above.

Answer 1

US law provides that US citizens and resident aliens must report and pay income tax on their worldwide income, wherever received. This applies to US citizens and resident aliens who live in the US, as well as to those who live outside the US.

IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad addresses tax payment for those who reside outside the US. (The linked page states the page was updated August 20, 2020. Thus, as of the date of this answer, that's the current edition.) Section 15 discusses the Foreign Earned Income and Foreign Housing Exclusion. A taxpayer who qualifies can exclude up to $105,900 from income otherwise reportable on IRS Form 1040.

Publication 54 states that to take advantage of the income exclusion, the taxpayer must meet all three of the following requirements:

1. Your tax home must be in a foreign country.
2. You must have foreign earned income.
3. You must be one of the following. (a) 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; (b) A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; (c) A U.S. citizen or a resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Note that subsection 3 is satisfied if the taxpayer is defined by either subsection 3(a), or 3(b), or 3(c). I do not know if Vietnam has a subsection 3(b) treaty with the United States. If the taxpayer is described by 3(a) or 3(c), however, 3(b) is irrelevant.

To claim the exclusion, the taxpayer must complete and file IRS Form 2555 along with the taxpayer's Form 1040.

Answer 2

The usual rule, for not just the US but almost all countries, is that tax residents of a country (for some definition of tax residence) are taxed on their worldwide income, whereas tax non-residents of a country are taxed only on their income from that country. So if you have income from a different country than you reside, it is usually the case that you are taxed on that work income by your country of residence, as well as the country where the income came from. (And yes, you can have income from a different country than you reside. For example, you can commute from one country to another country to work. Or, you can have non-work income like investments in a different country than you live.)

In addition to taxing residents on their worldwide income, the US also has the rule that US citizens are also taxed on their worldwide income, even if they are not resident in the US. This unusual rule is what that statement is trying to express.

Just because you, as a US citizen, will be taxed by both the US and Vietnam on your income from Vietnam (or income from other places while residing in Vietnam), and there is no tax treaty, doesn't mean you will pay double tax. You can use the Foreign Earned Income Exclusion and/or the Foreign Tax Credit to reduce your US tax from income that is taxed by both the US and a foreign country. (You can choose one or the other or the combination of both that gives you the most savings.) In particular, the Foreign Tax Credit reduces your US taxes by the amount of foreign taxes paid on double-taxed income, or the US taxes paid on that same income, whichever is less. The result is that you pay net taxes equal to whichever is of the two taxes is higher. So you will do at least as well as paying only one country's worth of taxes.