Even when American citizens live abroad, the US tax system still requires that they file tax returns on an annual basis. Understanding what fundamental forms and documents are needed is a crucial start in order to become compliant. Our expat-specialist experts have created the guide below to pilot you through the process of filing US taxes.
The Basics of Filing US Taxes
The most crucial part of filing US taxes is knowing what you’ll need to file. Expats in typical situations will face at least a few reports that were not required before they moved abroad. Expats are required to file US income taxes (federal and, if needed, state returns), as well as an informational return on assets held in foreign bank accounts through FinCEN Form 114 – also known as the Foreign Bank Account Report.
First Things First
Ensure you are aware of what documents you need to gather as well as the tax deadlines. The federal deadline for filing US taxes is generally April 15th; however, as an expat, you have an automatic extension to June 15th. You also have the opportunity to request an extension to October 15th. Don’t forget: FBAR returns are due April 15th with an automatic extension to October 15th as well.
The main documents you will need to collect in order begin filing US taxes are US and foreign income reports such as pay stubs, rental income, bank accounts, and retirement accounts. If applicable, investment account statements, as well as documentation of any self-employed income, are essential to have a complete picture of your passive or earned income. If you have interest or ownership in a foreign entity, you’ll need to gather the company’s financial statements as well.
Avoiding Double Taxation
The IRS offers many exclusions, deductions, and credits to help expats avoid double taxation. One of these is the Foreign Earned Income Exclusion, which allows expats who meet certain residency requirements to exclude up to $104,100 (for 2018) of foreign income from US taxation. To qualify for the exclusion, you must meet either the physical presence test or the bona fide residence test. For exclusion purposes, maintaining a travel log is vital in order to track your days and travel to and from the US.
The Foreign Tax Credit is also available and gives you the opportunity to offset US tax with a credit against income that has already been taxed in the country in which you live.
Other Tax Compliance Reporting
The documentation needed for FBAR purposes is the maximum account balance during the year for each foreign financial bank account. FBAR reporting must include bank accounts, investments, and retirement accounts. There is a $10,000 threshold which applies to all of your accounts, whether you have signature authority or own them jointly. The filing is required if the aggregate balance of your foreign bank accounts exceeded $10,000 at any point during the calendar year.
Finally, a very important form per FATCA rules and regulations is Form 8938. This form requires US citizens who have foreign financial assets over a certain threshold (stated below for expats) to report this information to the IRS. Financial assets include but are not limited to bank, brokerage, stock or security accounts, and foreign financial instruments. Also required are non-account assets such as business and trust ownership and certain contractual investments with foreign parties.
As an expat filing US taxes, you must include Form 8938 with your US Federal Tax Return if you are:
- Single, or married filing separately and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
- Married filing jointly and the total value of the foreign financial assets owned by you and your spouse is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
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