17 Things You Should Know About US Expat Taxes
The tax system in the United States is admittedly complicated for individuals and businesses. But it’s even more complicated if you’re currently living abroad. US expat taxes are typically both intimidating and confusing to people who have never filed them before, but thankfully, they can be simplified with the right system.
This article will help you understand the nature of US expat taxes, including who needs to file, when to file, and strategies you should consider during the process.
US Expat Taxes: Everything You Need to Know If you think you may need to file US expat taxes, these are some of the things you’ll need to know:
If you make money, you must file: Living abroad doesn’t exempt you from filing a US federal tax return. If you earn income anywhere in the world, you’ll be required to file a federal tax return. Source of income include wages and salary (from US or non-US sources), interest and dividends from your investments, and rental income. If you’re self-employed, the income threshold is $400, no matter how you choose to file. You may also need to file if you receive certain types of credits or if you owe special taxes.
You probably won’t owe US taxes: You have to file a return doesn’t mean you should expect to owe money. The US has several tax deductions, exclusions, and special credits designed to protect people from being taxed twice on the same income. Thanks to things like the Foreign Tax Credit, the Foreign Earned Income Exclusion, and the Foreign Housing Exclusion, you’ll likely get away with paying zero taxes in the US.
All US expats get a free extension (to June 15): As a US expat, you can ignore the standard April 15 deadline for federal tax returns; you’ll receive an automatic extension to June 15. If you owe US taxes, you’ll need to pay by April 15 to avoid the possibility of penalties or additional interest. If you were an expat but moved back to the US, this extension doesn’t apply: April 15 is your deadline.
You can apply for an additional extension: If you need more time to qualify or more time to prepare your return, you can also file for an additional extension. You’ll need to apply for an extension of time to file a US income tax return.
You can correct an erroneous return: If you make a mistake on your tax return, you’ll be able to amend or edit that return using Form 1040X. It’s best to file this paperwork before the IRS catches the mistake for simplicity.
Form 2555 will help you lower your taxes: The Foreign Earned Income Exclusion (FEIE) is designed to help you exclude up to $103,900 of foreign income earned from federal US taxation. It’s by far the easiest and most significant way ex-pats can lower their taxes, but it’s optional, and you must fill out Form 2555 to take advantage of it. You may also use Form 2555-EZ for a more straightforward approach. FEIE will remain active indefinitely for each tax return you file after the initial return.
Form 1116 will help you lower your taxes further: You’ll automatically get some benefits from the Foreign Earned Income Exclusion (FEIE), but you may also want to apply for an (FTC). To do this, you’ll need to fill out Form 116. You’ll earn a dollar-for-dollar credit on any taxes you pay to a foreign country when you do. In some cases, you’ll get more savings for this than for the optional child tax credit.
You can’t “double-dip” with FEIE and FTC: If you exclude $103,900 of your income with the FEIE, but you still have $30,000 remaining, you won’t be able to use the FTC on the $103,900 of income you already excluded; you can only offset the remaining $30,000.
US-earned income isn’t necessarily excluded: Keep in mind that these exclusions are designed for foreign-earned income. If you’re still making money from a US employer or client, that US-earned income may not be excluded.
You have to prove your residency: The IRS doesn’t want people to cheat the system by pretending to live in a foreign country to capitalize on special tax credits. To use the FEIE, you must pass the Physical Presence Test to prove your residency. You’ll need to prove that you’re physically present for 330 days or 365 days in a given country.
FEIE will exempt you from the Affordable Care Act: The Affordable Care Act currently requires that every American citizen have minimum, essential health insurance coverage or pay an individual shared responsibility tax. However, if you qualify for the FEIE or have a US expatriate healthcare plan, you’ll be exempt from these taxes.
Children can get complicated: If you have a US-born child who qualifies as a dependent, you can claim that child as a dependent even when you’re overseas. Often, this is beneficial, sometimes resulting in a tax refund. If you have a child born to a non-US parent, you may still be able to list that child as a dependent on your US federal tax return. However, if you do this, the child will be considered a US person and will have a US tax obligation unless they renounce their citizenship as an adult.
You may have to file FBAR: The Foreign Bank Account Report (FBAR) is an initiative designed to prevent people from hiding money in overseas accounts. If you have foreign bank account holdings that total more than $10,000, you must file this separately from your tax return. The deadline is April 15, in line with the deadline for your tax return.
You may have to file FATCA Form 8938: Similarly, you may have to file Form 8938 from the Foreign Account Tax Compliance Act (FATCA). This is similar to FBAR, but you may need to file one, both, or neither.
Renouncing citizenship may not help you: Some US ex-pats attempt to renounce their citizenship to avoid paying taxes. While this is possible, it’s also somewhat complicated. To do this, you must prove US tax compliance for a full five years before your date of citizenship renunciation. Depending on your net worth and current income, you may also be subject to an exit tax.
If you’re behind, you can catch up: If you’re just now discovering that you might have owed taxes as an ex-pat for the past few years, don’t worry—the IRS forgives ex-pats who don’t understand their tax obligations. As long as you file your previous years’ returns, FBARs, and other paperwork, you can get caught up, often without penalties.
You may also be required to file a state-level return: We’ve spent most of this guide talking about your federal-level income tax return, but depending on your state of former residence, you may also be required to file a state-level tax return.
Getting Help With US Expat Taxes: Are you still confused about ex-pat taxes? Are you looking for a solution to help you file your taxes abroad? Taxfyle can help. Contact us today, and start your taxes immediately with Taxfyle! We make US ex-pat taxes easy.