Overall, all US citizens and Green Card-holders are required to file a US Federal Income Tax Return each year if their income is over the minimum threshold. It doesn’t matter where you have earned this income, what currency it is earned in, or whether you have also paid taxes in the country in which you reside. You are required to file in the US if your income is above these levels. The thresholds are currently:
- Single with income over $9,350
- Married filing jointly with income over $18,700
- Married filing separately with income over $3,650
Note that you may also need to file state taxes as well as taxes for your small business operating overseas. Depending on your situation, you may also be required to file additional reports including Form 8938 and the FBAR (Form TD F 90-22.1) for foreign assets overseas.
Do I need to file a State Return?
When it comes to State Tax Returns, every state is different. Some states are more favorable for expats, as they have no income taxes. These states include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Other favorable States include New Hampshire and Tennessee, as they only collect taxes on dividend and interest income.
Unfavorable States include California, South Carolina and New Mexico; these states see their taxpayers as assets and will leave the burden of proof on you to prove you are no longer a resident. Ties to the state that would require you to file a State return include the following:
- Mortgage or lease payments on property
- State driver’s license
- State bank accounts or investments
- Telephone and utility bills
- Voter registration
- Library cards
- Mail correspondence
- Association memberships
- Dependents living within the state
If you have some of the above ties in one of the states that have income taxes, you may be required to submit a State Return until you prove residency in another state.
How do I report foreign bank accounts (FBAR)?
As a citizen or Green Card-holder, you are required to file Form TD F 90-22.1, also known as the FBAR (Report of Foreign Bank and Financial Accounts) with the US Department of the Treasury by June 30th of each year. So, for example, if you have had more than $10,000 located in financial accounts overseas at any given time during 2011 then you have until June 30th 2012 to report these accounts. It does not matter if the $10,000 was dispersed over multiple accounts in varying currencies; if their cumulative value was over $10,000, they must all be reported with the FBAR.
Please note that the form needs to be received by the Treasury by June 30th, not just mailed by June 30th.
What is the story with Form 8938 (Statement of Foreign Financial Assets)?
The IRS has introduced a new requirement for individuals with higher account balances held overseas — Form 8938. This form must be submitted with your tax return. US expatriates who meet the requirements of the Physical Presence Test or the Bona Fide Residence Test are required to submit this form if they have foreign financial assets of:
- Single Filers — more than $200,000 on the last day of the tax year or over $300,000 at any time during the tax year
- Married Filing Jointly — more than $400,000 on the last day of the tax year or over $600,000 at any time during the tax year
The limits are significantly lower for taxpayers living in the USA.
What is the Foreign Earned Income Exclusion?
The IRS has many tools in place in order to reduce double taxation. One of those tools is the Foreign Earned Income Exclusion (FEIE). If you qualify as an expat, you are able to exclude up to $92,900 of your foreign earned income from US taxation via Form 2555. Note that this amount cannot be deducted from any income earned inside the United States. Also, government employees are unlikely to qualify for the Foreign Earned Income Exclusion.
What is the Foreign Tax Credit?
One of the tools the IRS has in place to reduce double taxation is the Foreign Tax Credit. The Foreign Tax Credit provides expatriates with a dollar-for-dollar tax credit on your US expat taxes for taxes paid to a foreign government. For example, if you owed the IRS $2,000 in taxes but paid the Hong Kong government $500 in taxes, you could deduct the $500 from the $2,000 owed to the IRS and pay $1,500. This is applied to an expatriate tax return by attaching Form 1116.
What is the Foreign Housing Allowance?
The IRS allows qualified expatriates to deduct acceptable housing expenses from their total income. The limit changes every year and is based on a percentage of the Foreign Earned Income Exclusion. As the FEIE increases annually for inflation, the Foreign Housing Allowance also increases annually. This is applied to an expatriate tax return by attaching Form 2555. For more information on how the Foreign Housing Allowance works, please visit our US Expat Taxes Explained Series.
The IRS has multiple tools in place to eliminate dual taxation, but you must qualify as an expat to take advantage of them. In order to qualify as an expat, you must meet the following requirements:
- You must have foreign earned income
- Your tax home must be in a foreign country
- You must do one of the following:
- Pass the Bona Fide Resident Test — A US citizen who is a bona fide resident of foreign country or countries for an uninterrupted period that includes an entire tax year
- Pass the Physical Presence Test — A US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months
- Be a US resident alien who is a citizen or national of a country with which the United States has an income tax treaty with a non-discrimination article in effect who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
Does being self-employed change tax obligations?
If you are self-employed and you live overseas, you may still be required to pay self-employment taxes in the US, including Social Security. This would need to be paid before the Foreign Earned Income Exclusion so it is an actual out-of-pocket expense, not something that would be offset on your tax return. The rules are different for each country, so it is best to visit the Social Security website to see how this will work in your exact host country. Some countries such as the UK require that you Opt-Out of US Social Security (or you may need to pay both in the US and UK). This can add up quickly, so don’t ignore this!
What about expat taxes for non-residents?
Have you lived and worked in the United States as an expatriate? Do you have investments in the US that require you to file a tax return? We have dozens of clients who are non-residents of the United States and need assistance completing Form 1040 NR. If you have any questions about how you will be taxed as a non-resident in the United States, please do not hesitate to contact our accountants for expat tax advice.
