How do you report your income on your US expat taxes while you live abroad? While living abroad, your income is reported the same way it would be if you were living in the US. If you have earned income abroad and are wondering how to report it on your US expat taxes, this guide will prepare you with what you need to know to report your income to the IRS.
Reporting Your Income on US Expat Taxes
Good recordkeeping throughout the year is essential to accurate preparation of your US expat taxes — no matter the form you are filling out. This is particularly important when it comes time to report all of your foreign earned income, as nothing can be overlooked. Note that income must be reported regardless of where it was earned, what taxes were already paid on it, and what currency it was earned in.
The following types of income are going to be included on Form 1040 for your US expat taxes:
- Wages and salaries
- Taxable interest – (Schedule B)
- Ordinary dividends
- Returns, credits, or other offsets and local income taxes
- Alimony received
- Business income (or loss). – Schedule C or C-EZ
- Capital gains (or losses) – Schedule D
- Other gains (or losses) – Form 4797
- IRA distributions
- Pensions and annuities
- Rental real estate, royalties, partnerships, S-corps and trusts – Schedule E
- Farm Income
- Unemployment compensation
- Social Security benefits
- Other income
If you have earned any form of the above income, you are going to need to have documentation to explain how the income was earned and prove that the amount reported on your US expat taxes is indeed the true amount in the event of an IRS audit.
You’re also going to need to gather information about applicable deductions that need to be reported on your US expat taxes. These include:
- Educator expenses
- Certain business expenses – Form 2106
- Health savings account deductions – Form 8889
- Moving expenses for members of the Armed Forces
- Penalty on early withdrawal of savings
- Alimony paid
- IRA deductions
- Student loan interest
- Other deductions
You should receive many of these documents from their respective distributors throughout the calendar year, but it is important to keep everything organized so that information is available when it is time to fill out your Form 1040 for US expat taxes.
Completing Form 1040 for US Expat Taxes: Brian and Sarah Expat
Once you’ve gotten all of the income and deductions associated with your return, you’ll be ready to complete Form 1040 of your US expat taxes. To better demonstrate the process of completing the form, let us introduce you to Brian Expat. Brian and his wife, Sarah, are US citizens and have lived in Pennsylvania all their lives. They got married in 2012 and have been living in Thailand ever since. They also have two small children, Kevin and Audra Expat.
Brian works for a Thai company that handles American clients and has been working for a US firm in Thailand since 2012. Brian has been earning just over THB 4,000,000, which translates into $123,827.51 at the year’s average annual exchange rate. Sarah, on the other hand, does freelance writing from her home office while taking care of their young children, which earned Sarah $10,000. They have a savings account back in the US that generated $1,000 in interest income. Their last source of income in 2018 was the sale of their second property back in the US, which landed a gain of $30,000.
For their deductible expenses, Sarah completed an online Thai course that was administered by the US Department of Education. This cost $300 for six weeks and was work-related, as she is attempting to have articles published in Thai. She also has expenses from her business, including a new computer, that total $1,000. Lastly, Brian is still paying back his loans for his education back in Pittsburgh, allowing him to deduct the $200 in interest that he paid.
Armed with all of this information, we can successfully complete their Form 1040 for their 2018 US expat taxes.
Filling out Form 1040
The first part of filling out Form 1040 is going to be completing the information section. This includes your name, your spouse’s name (if filing jointly) and any dependents that you may be claiming. Since Brian and Sarah are filing jointly this year, they will both be included in their section. Their children’s information is also provided.
Next, Brian and Sarah are going to report their income on their US expat taxes by using the appropriate tax documents from Brian’s employer, Sarah’s accountant, the sale of their property and the bank statement proving the interest they earned.
Most of the income earned will be reported directly on the second page of the Form 1040. Brian’s wages will be listed on Line 1, Wages salaries, tips, etc. Their interest income will be listed on Line 2b, Taxable Interest.
Because Brian and Susan are both US citizens who have lived abroad the entire year, they are eligible for the Foreign Earned Income Exclusion (FEIE). The FEIE will apply to each of them separately. For 2018, the maximum amount of FEIE was $103,900 per qualifying person. Because of this, Brian will be eligible to exclude $103,900 of his $123,828 in wages, and Sarah will be able to exclude the entire $8,700 she earned from freelance writing. They will reflect this total $(112,600) FEIE on line 21 of Schedule 1, and also attach individual Forms 2555 to their return.
Schedule 1, Additional Income and Adjustments to Income, is new for the 2018 tax filing year. As shown above, the FEIE is factored in with Brian and Sarah’s other income to arrive at the total of $(73,900), which is included in the Total Income reported on line 6 of Form 1040.
The next step is going to be identifying their Adjusted Gross Income for their US expat taxes. This includes Brian’s allowable student loan interest and half of the self-employment tax paid by Sarah (since Thailand and the United States do not have a Totalization agreement). These adjustments will be reflected on the bottom section of Schedule 1 and are taken into consideration to arrive at the total reported on Form 1040 line 7.
After calculating their total income and adjusting it for the appropriate deductions, Brian and Sarah have an adjusted gross income of $50,299 (as seen on Line 7 of Form 1040). They are ready to calculate their tax owed on their US expat taxes.
Calculating Taxes Owed
The first step in determining how much you are going to need to pay on your US expat taxes is determining your taxable income. Since Brian and Sarah have are filing jointly, they are allowed a standard deduction of $24,000. This reduces their taxable income to $26,299 (line 10 of Form 1040).
Calculating your taxes owed on your US expat taxes can be intimidating, but the IRS provides you with useful tools to identify how much you owe. If you made less than $100,000, you can find your tax rate on page 67 – 89 of the IRS’s Instructions for Form 1040. If you earned more than $100,000, you are going to need to use the tables found on page 39 of the IRS’s Instructions for Form 1040.
It is important to note that when you are claiming the Foreign Earned Income Exclusion, there is a special worksheet to complete to calculate your tax due for the year. This can be found on page 43 of the IRS’s Instructions for Form 1040 (https://www.irs.gov/pub/irs-pdf/i1040gi.pdf)
For their total amount owed, Brian and Sarah are able to lessen their taxes with certain credits. As expats, they are able to deduct $301 for the Foreign Tax Credit (attach form 1116 and Schedule 3) and an additional $4,000 for the child tax credit (shown on Form 1040, line 12).
After is liable for self-employment tax on her net business profits, which are accounted for on Schedule 4 (and calculated on Schedule SE).
After considering these additional credits and other taxes, their total amount due is $2,714, as seen below on line 15 of Form 1040:
A special note to add relates to health care coverage. If you, or someone in your household, did not have qualifying health care coverage or qualify for an exemption during 2018, you may be subject to a shared responsibility payment. This shared responsibility payment will be included on Schedule 4, Line 61. However, as Brian and Sarah qualify for an exemption (that is, they are US citizens living abroad), no payment is assessed. Brian and Sarah will need to include Form 8965 with their return to show this exemption.
The last steps in finishing Form 1040 for US expat taxes is signing the form, filling out the preparer’s information (if necessary), and sending it to the appropriate agency with the necessary payment.
Completing Form 1040
Now that Brian and Sarah have completed their taxes for 2018, they only need to focus on staying compliant with the IRS moving forward. The best way to do so is to stay aware of deadlines for expats, keep information for completing the returns to come in the future (including prior-year tax returns), and keeping up to date with the annual changes of tax policies. It is always good to talk to an expert about your US expat taxes to avoid time-consuming and costly mistakes.
More Information On US Expat Taxes
This post might make filing for the Foreign Earned Income Exclusion easier for you. If you need assistance with the preparation of your Form 1040 for US expat taxes or would like to know more about our expat tax services, please contact us.
Originally published in 2011; updated February 4, 2019.