As an American, it does not matter where in the world you live; you need to file US taxes. If you are an expat, you still need to submit your US taxes every year. However, living abroad does provide you with an automatic extension date for filing, with the date being extended from April until 15th June. If you need longer, you can request an extension up to 15th October.
Do I Need to File My Taxes?
By US law, Americans are required to submit taxes if they earn either $400 through self-employment or have an income of over $10,000. This applies to all Americans, regardless of;
Can I Reduce My US Tax Liability?
If you reside outside of the USA, then you may be able to claim certain IRS exemptions. In fact, some expats can eliminate their US tax bill entirely. However, regardless of how much you can reduce your tax liability, even if you have nothing to pay, you still need to file a tax return.
Foreign Earned Income Exclusion (FEIE)
One of the tax exemptions for expats is Foreign Earned Income Exclusion. To qualify for this, you need to live and work outside of the USA. You must also meet requirements of the Bona Fide Resident Test or the Physical Presence Test. Meeting these requirements means you can exclude up to $104,100 (in 2018) of your US tax return solely for federal income tax.
To meet the requirements of the Bona Fide Resident Test, you need to prove that you are a resident of another country and demonstrate this by paying taxes in the country, having a permanent home there or by having official resident status.
To pass the Physical Presence Test, you must be able to prove that you are physically in another country for 330 days out of 365 days in a twelve-month period. There are some strict requirements which include;
However, there is some flexibility as you can change when the twelve-month period starts by applying for an extension when it comes to filing your taxes.
For FEIE, this only excludes you from federal income tax. State taxes, Social Security and Medicare taxes cannot be excluded. The income must be from services performed as an employee or independent contractor. If this applies to you and you want to claim FEIE, make sure to add form 2555 to your federal income tax return. You can also request other allowances such as Foreign Housing Allowance alongside FEIE.
Claim Foreign Tax Credit
Foreign Tax Credit is another allowance that can reduce your US tax bill if you pay tax abroad. For every dollar that is spent on the same income tax abroad, a dollar is taken off your US tax bill. This scheme is to avoid double taxation on your earnings.
In order to claim foreign tax credits, you must pay taxes in other countries. This does not include any countries that the US has sanctioned. You only qualify for the allowance if you paid your taxes without any gain and you were legally obliged to pay them.
In order to claim Foreign Tax Credit, you must fill out form 1116 for every foreign income stream that you have. It is important to note that you cannot claim Foreign Tax Credit on earnings you have excluded using Foreign Earned Income Exclusion.
Foreign Tax Credit is elective. For countries with a higher tax rate than the US, then you may benefit as the difference can be carried over to future tax bills. In some cases, it may be advantageous to claim both FEIE and Foreign Tax Credit, but it will depend on individual circumstances.
Avoid FBAR Penalties
Another critical aspect to include in your tax return is filing a foreign bank account report (FBAR). Failure to do so, if you have foreign bank accounts with over $10,000 in total, or you have investment accounts, can lead to very high penalties. This applies to all Americans with foreign bank accounts whether they live in the USA or elsewhere.
The form for declaring foreign bank accounts is form 114 and applies to those with a minimum of $10,000 in foreign bank accounts. This is at any point during the tax year and applies even if the money is split between several accounts.
If you haven't realised the need for FBAR, you can avoid penalties by using the Streamlined Procedure from the IRS. With this, you must file your last three years' tax returns and last six years' FBARs and declare that failure to file was non-wilful.
Stay Penalty Free
The Streamlined Procedure also applies as an amnesty system for any expats who were not aware they had to file US tax returns. This avoids penalties and can help you to catch up with your tax. The Streamlined Procedure will usually cost and to complete this; you must state that failure was non-wilful, pay outstanding taxes and file the last three tax returns and previous six FBARs.
Remember to Pay All Taxes
While there is a lot to remember when filing your US tax returns, you also need to remember to stay clued up on foreign taxes too. As an expat, you will still need to comply with the tax rules of the country you are in. Remember these rules can vary. It is best to seek guidance where possible to avoid penalties and remain compliant.
September 22, 2023
Updated: June 21, 2023 CET