September 13 2019
Living abroad is a thrilling experience, and filing taxes is often the last thing on expats’ minds, to the extent that many expats don’t file at all, either because they don’t realize that Americans have to file from abroad, some they simply forget. Either way, not filing a US federal tax return from abroad can be a costly error.
When US citizens living abroad file a federal tax return from abroad, they don’t just have to report their US source income, but all of their worldwide income.
Some expats assume that a tax treaty protects them from paying US taxes from abroad. Unfortunately this isn’t the case. Instead, expats must claim one or more IRS provisions by filing the relevant additional forms when they file their federal return. One of the most useful of these IRS provisions is called the Foreign Earned Income Exclusion, which can be claimed on Form 2555 and which allows expats to exclude the first around $100,000 of their earned income from US taxation.
Expats who pay foreign taxes in their country of residence may be better off claiming the Foreign Tax Credit though, by filing Form 1116. The Foreign Tax Credit allows expats to claim a $1 US tax credit for every dollar of foreign tax they’ve paid abroad. For expats who live in countries with higher income tax rates than the US, claiming the Foreign Tax Credit can eliminate their US tax bill completely. Furthermore, the Foreign Tax Credit can be applied to unearned (e.g. rents, dividends etc.) income as well as earned income.
Expats who have over $10,000 in total in foreign registered bank or investment accounts at any time during the year are required to report all their foreign accounts by filing FinCEN form 116, also known as an FBAR (Foreign Bank Account Report).
Some expats may have to continue filing state taxes from abroad too, depending on the rules in their former state, which often consider how permanent or temporary their move abroad is and what connections they still have to the state.
Americans who live abroad and have children with US social security numbers should consider claiming the Child Tax Credit. Expats who have no US tax bill thanks to claiming the Foreign Tax Credit can claim a $1,400 refundable payment (i.e. cash payment) per child.
Expats are also required to file additional forms to report any foreign business interests that they may have.
As well as an FBAR, expats are required to report their foreign financial assets by filing Form 8938 if the total value of their assets exceeds certain thresholds, starting at $200,000.
US tax filing for expats can be something of a minefield, both in terms of staying compliant, and in terms of filing in the most beneficial way possible for each expat. This means it makes sense to seek assistance from a US expat tax specialist, who will normally save more money - not to mention hassle - than they cost.