US Taxes While Living Abroad FAQ
Do I need to file a US tax return? What forms do I use? Can I deduct foreign taxes?... The following FAQ about filing your US taxes even though you live outside the USA was adapted from a contribution by I.J. Zemelman.
I am an American living and working abroad. Do I need to file a US tax return?
Regardless of where you live now, being a United States citizen requires that you file a yearly tax return with the IRS. Green card holders and all US citizens are required to file a US return, no matter where they live, as long as their income (earned in-US and abroad) is just over $9,000. Many people wrongly assume that because they have never owed money to the IRS, they simply dont have to file. Earning anything over $9,350.00 does require you to file, however. The US has treaties with many foreign countries that will reduce or even eliminate actual owed tax. You cannot, however, take advantage of these benefits if you don't file.
Do I need to file a State Tax Return?
As is the case with many legal matters, each US state sets its own rules regarding state taxes and expats. Some states do demand that you file a state return, while others release you when you move away. The rules can be complicated, so be sure to ask your tax preparer before making assumptions as to the requirements of your former home. The most stubborn states are New Mexico, California, Virginia and South Carolina. If you moved abroad from one of those states, it is unlikely that you have been released from the obligation of filing. To read more about this issue see: State Taxes and the American Expats - Can You Ever Set Yourself Free?
What forms do expats need to complete for their Federal Income Tax Return?
Just as you did when living in the US, you need to fill out a 1040 form. The forms specifically applicable to your life as an expat are 2555 and 1116. These are the forms by which you declare your foreign earned income and qualify for the Foreign Tax Credit. The Schedules differ depending on your situation. The most common ones can be found here: en.wikipedia.org . If you have a foreign bank account you would also need to complete informational forms TDF 90-221 (FBAR) and, new in 2011, form 8938. More about these below.
How do I know if I qualify for the Foreign Earned Income Exclusion?
The IRS qualifies you as eligible for the Foreign Earned Income Exclusion (FEIE) if you fall into one of three categories:
1. You are citizen of the US who qualifies as a bona fide resident of another country for a period of time containing one entire tax year.
2. You are a resident alien of the US whose home country has an income tax treaty with the US. Additionally, you must be a bona fide resident of another country for a period of time containing one entire tax year.
3. You are a citizen or resident alien of the US whose physical absence from the US constitutes a minimum of 330 days out of any 365.
Can housing expenses be excluded or deducted?
It is sometimes possible to exclude and/or deduct housing expenses when living overseas. Rent, repairs, utilities and insurance are some of the things that might be deductible either in part or in whole. When filing your taxes, present your international tax professional with an accurate and detailed list of your overseas expenses. He/she will be able to secure for you the highest possible deductions.
Can I deduct foreign taxes paid?
As a general rule, tax you owe the US on foreign income can be substantially reduced or even zero if you have already been taxed on said income in your country of residence. You can claim these paid taxes either as credits on your Federal return or claim each amount as an itemized deduction. The optimal choice between deduction or credit depends on your country of residence and whether or not this country has a tax treaty with the US as often there are substantial differences between US and foreign tax laws with respect to what the foreign country taxes and what it does not tax. For example, even though some countries do not tax capital gains, these are subject to US tax as are foreign employer contributions to foreign social security and retirement pension funds, as well as both employer and employee contributions to foreign deferred-income plans. Self-employed individuals run a much higher risk of being double taxed and you should contact an international tax professional immediately in this case. For more details see this article: Foreign Tax Credit - the Preferred Anti Double Taxation Tool for American Expats
When is my tax return due?
For Americans living within the US, the tax return is always due on April 15th or the following Monday (if the 15th is a weekend or a holiday). A two month extension is automatically given to citizens living abroad putting the expat due date (for filing purposes) at June 15th. The two month extension is automatic, but an additional extension can be filed for if needed. The filed-for extension moves the due date (for filing purposes) as far back as October 15th. Neither of these extensions apply to paying taxes. Any taxes owed, regardless of whether you are stateside or abroad, are due on April 15th.
How do I file for an extension?
If you need to file for an extension, simply visit www.officialpayments.com . Click on "Federal IRS Payments". Select Personal under Payment Category. Choose "Form 4868" (Extension). For a small fee, you can quickly and easily file for an extension to October 15th.
What about my foreign bank accounts? What are FBAR and Form 8938?
We saved the best almost for last. In order to help it track those Americans who are not reporting their foreign income, IRS and the US Treasury have recently instituted a number of informational forms that must be filed.
1. Form TDF 90-221 also known as FBAR. This is a relatively simple form that is used to collect basic information on foreign financial account controlled by a US citizen. The form is sent to the Treasury Department and is not filed with your tax return. As it is only an informational form, it will not have impact on your tax liability. Financial account definition includes: a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts. As of July 2013, this form is supposed to be filed electronically as Form 114.
2. Its important to note that the FBAR must be received by the Department of the Treasury by June 30th. There is no extension for filing this form. The FBAR is filed separately from your tax return. It should be filed electronically on the FinCen website.
3. FBAR Penalties. The penalties for non-filing of the FBAR are extremely harsh. They range from an automatic penalty of $10,000 to 50% of the balance of the account. It gets worse - if the IRS investigator can prove that you willfully withheld the information from the government criminal charges can be filed.
4. Form 8938 will be required starting fiscal year 2011. Form 8938 (FATCA) must be attached as an annex to your 1040. The reporting requirements of foreign financial assets are more extensive and more complicated than those for the FBAR. The threshold of foreign assets owned depend on where one is domiciled and whether one is filing married filing jointly or otherwise.
Form 8938: www.irs.gov/pub/irs-pdf/f8938.pdf
Instructions for Form 8938: www.irs.gov/pub/irs-pdf/i8938.pdf
Form 8938 is required under the Foreign Account Tax Compliance Act (FATCA), passed into law in March 2010. FATCA also requires foreign financial institutions banks, brokers, pension funds, insurance companies, hedge funds, mutual funds, trusts to report to the IRS holdings of their clients who are U.S. persons. This will come into force on January 1, 2014 and will allow the IRS to cross-check between reports of foreign financial institutions and individual filings of Form 8938. All institutions that do not comply will have a 30% withholding tax imposed on all its transactions concerning U.S. securities. In addition, FATCA will require that any foreign company not listed on a stock exchange or any foreign partnership which has 10% U.S. ownership to report to the IRS the names and tax I.D. number (TIN) of any U.S. owner.
Can I e-file my US Federal tax return?
There are two options for expats to file their tax returns: e-file or mail the return to the IRS. We wrote a separate article that describes who can e-file and who has to mail it in . If you choose to mail your tax return it should go to:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
Estimated tax payments should be mailed with Form 1040-ES to:
Internal Revenue Service
P.O. Box 660406
Dallas, TX 75266-0406
You should always double-check the address here: www.irs.gov
Should I prepare my return myself or have a professional do it?
This is really a personal decision that you have to make for yourself. It is the opinion of this professional that US tax code is growing more complex by the year; moreover IRS is making the process much more complicated if you reside abroad. Therefore we would strongly urge expats to consider professional help.
However - please take care to check the credentials of the professional you hire. Make sure that they have sufficient experience preparing expatriate returns. We often encounter sloppy, or even outright incorrect returns, prepared by CPAs who have not had sufficient experience with expat taxes; even if they have done a great job on the clients standard tax return back home.
This article of advice on filing your US taxes while living abroad was adapted from a contribution by I.J. Zemelman, EA, founder of "Taxes for Expats."
Last Updated February 6, 2014