The United States tax code is incredibly lengthy and complex. However, if you live in another country and have U.S. tax obligations, understanding certain aspects of this code is essential. Below are 40 Things You Need To Know About US Expat Taxes to make sure you are in compliance when it’s time to file your tax return.
1. Living outside the country doesn’t eliminate your obligation to file.
Some expats mistakenly believe that living outside the United States excuses them from their obligation to file U.S. taxes. However, filing requirements still apply to people who live in other countries.
2. The United States taxes income earned in other countries.
Although most countries only impose tax on income sourced from within their borders, the United States imposes tax on income earned anywhere. Thus, even if you earn all of your income from another country, you may still need to pay taxes to the U.S. government.
3. The United States requires you to consider your worldwide income for tax purposes.
When determining whether you must file or how much tax you need to pay, you will need to calculate your worldwide income. The United States defines your worldwide income as any wages earned in the United States, any wages earned in another country, all interest income, all dividend income, all rental income and any other type of income you may have earned during the year.
4. There are specific requirements that determine whether you must file.
Specific requirements established by the Internal Revenue Service apply to U.S. taxpayers living in other countries. For example, if your worldwide income exceeds the IRS filing threshold for your filing status, you will be required to file a return. You may also be required to file if you owe special taxes.
5. You may want to file a return even if you aren’t required to do so.
Some expats who are not required to file a tax return may gain benefits from filing anyway. For example, if you are eligible for certain credits and/or a refund of taxes you paid, you should file to get money back from the IRS.
6. Self-employed expats are subject to strict filing requirements.
For expats reporting only employment income, filing thresholds are all above $12,000. However, if you are self-employed, you will need to file a tax return if you earn more than $400 during the year. This requirement applies even if all of your money comes from sources outside the United States.
7. Most expats won’t pay any taxes to the United States.
Although many expats will need to file a U.S. tax return, they are unlikely to owe any taxes to the IRS. Thanks to several exclusions, credits and deductions, the majority of expats are able to bring their tax liability to zero.
8. The exclusions, credits and deductions available to expats have complex qualification requirements.
Although most expats will qualify for the available credits, deductions and exclusions, you must meet specific requirements. Proving that you meet these requirements is sometimes daunting, so getting assistance from a professional is recommended.
9. Many U.S. expats will benefit from the Foreign Tax Credit.
The Foreign Tax Credit is available to most expats and can dramatically reduce the amount of taxes you owe. The Foreign Tax Credit allows you to reduce your U.S. tax liability by the amount you paid to a foreign country. To claim this credit, you must file Form 1116.
10. Many expats qualify for the Foreign Earned Income Exclusion.
Using the Foreign Earned Income Exclusion, you can exclude a significant portion of the income you earned in another country. Most expats qualify for and use this tax benefit every year to reduce their U.S. tax liability.
11. You can’t use the Foreign Tax Credit on excluded income.
If you use the Foreign Earned Income Exclusion to reduce your U.S. taxable income, you won’t be able to use that same income to claim the Foreign Tax Credit. However, you may still be able to use both of these tax benefits if you exhaust one and have leftover income that can be used to claim the other.
12. You may be eligible for both the Foreign Earned Income Exclusion and the Foreign Tax Credit.
Many expats qualify to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit. However, because you cannot use the same income to qualify for both tax benefits, you may need to allocate different income to each benefit.
13. The way you allocate income to the Foreign Earned Income Exclusion and the Foreign Tax Credit will impact your overall tax liability.
Choosing to allocate the majority of your income to the Foreign Earned Income Exclusion may have a different effect on your tax liability than choosing to allocate the majority to the Foreign Tax Credit. The allocation method that offers the most savings depends on your specific situation. Talking to an expat tax professional is the best way to determine how you should use these two benefits for the maximum advantage.
14. You may benefit more from the Foreign Tax Credit if you are claiming a child tax credit.
Most expats will find that allocating the majority of their income to the foreign earned income exclusion is most beneficial. However, if you are also claiming a child tax credit, it may be in your best interest to choose the foreign tax credit over the exclusion. A tax professional can help you determine the best course of action based on your individual situation.
15. The Foreign Earned Income Exclusion is not automatic.
Although most expats will qualify for the Foreign Earned Income Exclusion, it will not apply automatically. Instead, you will need to claim this exclusion by filing Form 2555 or Form 2555-EZ.
16. One you elect the Foreign Earned Income Exclusion, it will apply automatically in future tax years.
After you elect the Foreign Earned Income Exclusion, it will automatically apply in future tax years until you decide that you don’t want to use it anymore. However, you will still need to file Form 2555 or Form 2555-EZ each year.
17. After you decide not to claim the exclusion, you need IRS approval to claim it again.
After you decide to revoke the Foreign Earned Income Exclusion, you won’t be able to use the exclusion for the next five tax years unless you get approval from the IRS.
18. The Foreign Tax Credit can be carried over.
If you are unable to claim the full amount of foreign income taxes you paid or accrued during one tax year, you may be able to carry the excess over for the next 10 tax years. You may also be able to carry the excess back to the previous tax year.
19. To use the Foreign Earned Income Exclusion, you must pass a residency test.
In order to qualify for the Foreign Earned Income Exclusion, you must have a tax home in a foreign country and pass either the bona fide residence test or the physical presence test. You can qualify by passing either the bona fide residence test or the physical presence test.
In rare cases, you may qualify for an exception to the residency requirement. Examples include situations in which you must leave a foreign country because of war, civil unrest or some other unavoidable issue. However, the IRS will scrutinize these cases carefully.
20. The physical presence test has specific requirements.
To meet the requirements of the physical presence test, you must be physically present in a foreign country for at least 330 days out of a consecutive 12-month period.
21. The bona fide residence test may be more difficult for some expats to pass.
To pass the bona fide residence test, you must show that you have resided in a foreign country for an uninterrupted period that includes an entire tax year (i.e. January 1 through December 31). You must also show that you have no intention of moving back to the United States in the immediate future. The IRS decides whether you pass this test on a case-by-case basis.
22. Keep careful track of travel time.
Most expats use the physical presence test to qualify for the foreign earned income exclusion. However, the IRS has stringent requirements with regard to the amount of time you must spend in another country. For this reason, it is important to keep careful records of your travel time and perform all calculations carefully. Keep in mind that time you spend traveling by air or sea will not count as time spent in a foreign country.
23. Expats receive an automatic filing extension.
If you are an expat living outside the United States, you will receive an automatic extension on your filing deadline to June 15. However, it is important to note that any taxes you owe must still be paid on the original due date. Otherwise, you may owe penalties and interest.
24. You can file for an additional extension.
If you need more time to qualify for certain tax benefits, such as the Foreign Earned Income Exclusion, you can file an extension that will extend the due date of your tax return until October 15. Filing Form 2350 may extend the due date even further.
25. Expats can amend previous returns.
Because expat returns are so complicated, making mistakes is common. However, the IRS allows expats to amend previous returns if a mistake is discovered. For example, if you find that you didn’t take all of the deductions you could have taken or that you forgot to claim some income, you can amend your return. To amend a previous tax return, simply file Form 1040X.
26. It is best to file an amendment if you find a problem.
If you find a problem with a past tax return, you may be tempted to ignore it in hopes that it will never be discovered. However, it is generally best to file an amended return if you know you have made an error. Filing an amendment before the IRS notices the mistake will often reduce the penalties you owe.
27. You must report rental income.
Even if you are earning rental income abroad, all rental income must be reported on your tax return. Fortunately, you will be able to reduce the amount of this income that is subject to taxes in many cases by claiming deductions against it. Deductions usually consist of expenses related to managing the property.
28. You may still need to file a state tax return.
Many expats believe that moving outside the United States will eliminate the need to file a state tax return. However, this is not always the case. All states have different rules that apply to people who once lived in the state and are now living abroad, and some states may continue to consider you a resident even after you have moved out of the country.
For this reason, it is important to check with your state to determine whether you still have filing requirements. A professional expat tax preparer can also help you figure out your responsibilities for filing and/or paying state taxes.
29. Income earned in the United States cannot be excluded.
Many expats still earn income that comes from sources in the United States. Even though you are now living outside the U.S., this income may still be subject to taxation. Because it is not foreign earned income, it cannot be excluded using the Foreign Earned Income Exclusion.
30. Renouncing your citizenship may or may not help you.
Some expats who do not want to keep up with United States tax filing and payment requirements may decide to renounce their U.S. citizenship. However, you cannot renounce your U.S. citizenship and avoid tax liability without first showing that you have been in compliance with IRS requirements for the past five years.
31. If you renounce your citizenship, you may owe an exit tax.
If you renounce your citizenship to avoid U.S. tax liability and filing requirements, you may be forced to pay an exit tax. This tax will be based on your net worth and your income. Be sure to talk to a tax professional before you make this decision.
32. You may not have to pay Social Security taxes twice.
In some cases, expats end up paying Social Security taxes to two different countries, which increases tax liability considerably. However, if you are earning your foreign income in one of the 26 countries that have a totalization agreement with the United States, you won’t be subject to this double taxation. Instead, the agreement determines which country will receive your Social Security tax payments and which country will be responsible for covering any benefits you receive later.
Keep in mind that you cannot use the foreign earned income exclusion or foreign tax credit to reduce U.S. self-employment tax.
33. You can still receive U.S. Social Security benefits as an expat.
Even if you are an expat living abroad, you may still be able to receive Social Security payments from the United States. In fact, you will be eligible to receive these payments in most countries around the world. If you are currently living in a country where you are unable to collect Social Security benefits, you can collect the accrued benefits if you ever move to a country that allows these payments.
34. Your Social Security benefits may be taxable.
When receiving Social Security benefits inside the U.S., the benefits you receive may be subject to taxation. The same is true when you are living outside the United States. Regardless of what you think your requirements will be, be sure to report these benefits on your United States tax return. In most cases, these benefits will not be taxed unless you have other income to include.
U.S. citizens who are residents of the following countries are exempt from U.S. tax on their benefits:
- Italy. (You also must be a citizen of Italy for the exemption to apply.)
- United Kingdom.
35. You may need to file FBAR.
The Foreign Bank Account Report, also known as “FBAR” or “FinCEN Form 114,” is part of the United States’ efforts to stop taxpayers from keeping money overseas in order to avoid paying taxes. This report is required if the total value of all your foreign bank accounts is greater than $10,000 at any point during the year.
FBAR requirements apply to all accounts in which you have an ownership interest or signature authority. The filing requirement is based on the aggregate value of these accounts, which means that you must report all accounts even if individual accounts have values lower than $10,000.
The FBAR must be filed on tax day, and it will be filed separately from your tax return. This form must be filed using the designated e-filing system established by the IRS.
36. You may need to file FATCA Form 8938.
FATCA Form 8939 is similar to FBAR but has different requirements. If you have foreign bank accounts or other assets that exceed specific filing thresholds, you will need to file this form. Unlike FBAR’s thresholds, FATCA Form 8938’s thresholds depend on your filing status and residency status. In some cases, you may need to file both FBAR and FATCA Form 8938.
37. If you have not filed FBAR or FATCA Form 8938 when required, you need to catch up.
Some expats have failed to keep up with up with FBAR or FATCA Form 8938 filing requirements for many years, often because they are unaware that these requirements existed. Although it may be tempting to ignore the problem and hope it goes away, this is not the best approach. However, if the IRS discovers your mistake, you may pay harsh penalties.
Fortunately, you may be able to reduce the penalties you owe or even eliminate them by utilizing one of the IRS’ programs for taxpayers who need to catch up on FBAR or FATCA Form 8938 filing. The most common example is the IRS Streamlined Offshore Filing option, which helps you to become compliant without penalties.
38. You may be able to reduce taxes more with the Foreign Housing Exclusion.
Although not as common as the Foreign Earned Income Exclusion or the Foreign Tax Credit, the Foreign Housing Exclusion is another option expats can use to reduce taxable income. This exclusion allows you to deduct certain housing expenses from your taxable income, such as rent or utility payments.
39. You can still claim a child tax credit.
Many people think that living overseas may prevent them from claiming child tax credits for dependent children. However, as an expat, you can still qualify for this tax benefit. You must show that your dependent children have a U.S. Social Security number in order to claim it. In some cases, claiming the child tax credit may even result in a refund.
40. Professional assistance with expat taxes is highly recommended.
The United States tax code is complicated enough for people who live and earn all income within the United States. As an expat, the situation can be even more confusing. Unfortunately, the IRS imposes significant penalties on anyone who does not meet their filing requirements and/or pay all of the owed, regardless of whether they are currently living in the United States. For this reason, it is important to consult an expat tax professional if you are living and working in another country. A professional who has experience with expat taxes can make sure that you are in full compliance with all relevant laws and paying no more than your fair share. The right tax professional can also help you plan for future tax years to reduce your liability and maximize your wealth.
Tax Samaritan is a full-service firm specializing in helping expats with their United States tax liabilities and requirements. We can handle both federal and state tax returns, as well as compliance issues, amendments, back taxes and more. Tax Samaritan stands behind all of the services provided. We believe that every client should be satisfied, and ensuring client satisfaction is our top priority. Our team is composed of enrolled agents and certified public accountants who understand IRS laws and procedures, guaranteeing that you have the resources you need to meet all filing requirements, pay your taxes on time and minimize the amount you owe.
Our services are affordable, and many of our clients return year after year. Contact us today to learn more about how we can help with your expat tax needs or if you have any questions on our list of 40 Things You Need To Know About US Expat Taxes.