This article was first published on April 7, 2011. It was updated on June 24, 2015, with information relevant to the 2014 tax years.
One of the frustrations we frequently hear about US expat taxes is a lack of information. Finding accurate, easy-to-understand information can be quite difficult. The United States is one of the few countries that taxes a citizen on their worldwide income, regardless of where the income is earned. That means that you, as an American, will in all likelihood need to file taxes both in the United States and in your host country. This blog installment is designed to give you a brief introduction to the key areas of US taxes and how these elements affect your expatriate tax return preparation. Check back frequently as we frequently share information on a variety of US expat tax topics.
Foreign Earned Income Exclusion
Qualifying US citizens who live and work abroad may elect to exclude up to $99,200 of their foreign earned income on their 2014 US expat taxes or $100,800 of their foreign earned income on their 2015 US expat taxes. To qualify, a US citizen or resident alien must have earned income in a foreign country, and must meet the Bona Fide Residence or Physical Presence Test. This exclusion is claimed on Form 2555, and attached to Form 1040 with your US expat tax return. This exclusion also allows you to deduct part of your foreign housing costs. This is based on 30% of the FEIE or up to either $29,760 for the 2014 tax year or $30,200 for the 2015 tax year, note that this amount is increased in about 400 “high cost” locations such as London, Paris, Hong Kong, etc.
Foreign Tax Credit
It is likely that a US citizen’s residence in a foreign country triggers taxation in the foreign country as well as the United States. The Foreign Tax Credit is designed to reduce the burden of double taxation on your US expat taxes. US citizens may elect to claim a tax credit for foreign income taxes paid or incurred, on their US expat taxes. The credit is limited to the amount of US tax liability reported on Form 1040, but if you have more credit than you have US tax liability you can carry it backwards for 1 year or forward for up to 10 years.
Foreign Bank Accounts
If you are a US person who has financial authority over one or more foreign account(s), you may need to file the FBAR. If the cumulative balance of these accounts exceeded $10,000 at any time during the calendar year, you must file FinCEN 114, Report of Foreign Bank and Financial Accounts (FBAR) by June 30th each year. This form is filed separately from your US expat taxes, and must be filed to the US Treasury by June 30th.
US Expat Taxes: Married to Non-US Citizen
A US citizen may elect to file jointly on US expat taxes with their non-US citizen spouse if both spouses elect to treat the spouse as a resident. Remember that if you do elect to file jointly, you must do so on future returns as well. While this election allows the US to tax the non-US spouse’s worldwide income, it also allows the Foreign Earned Income Exclusion to be doubled. In order to make this election on your US expat taxes, the non-resident must have an Individual Taxpayer Identification number (ITIN). The ITIN should be applied for through the IRS via Form W-7. The processing of the ITIN application can take up to six weeks, so it’s important to apply before filing your US Expat taxes.
Dates for Filing
US citizens are required to file their US income tax returns by April 15 each year. Usually the deadline is April 15 but can be extended in certain years if that date falls on a weekend or is a holiday. However, a US citizen living abroad on April 15 is entitled to an automatic 2- month extension to file their US expat taxes. Despite the automatic extension, all US expat taxes owed still need to be paid by April 15 to avoid any penalties or interest.
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Getting an Extension on Your US Expat Taxes
The automatic extension to file US expat taxes is granted simply by attaching a statement to Form 1040 when filed by June 15. An additional extension to October 15th in both years may be requested via Form 4868. Expatriates who need additional time to meet the Bona Fide Residence or Physical Presence Test may request an extension using Form 2350. The extension is generally granted for an additional 30 days after either of the tests have been met.
Foreign Exchange Impact
When you file your US expat taxes, all of the amounts must be reported in US dollars. The IRS would prefer that each transaction is converted to US dollars at the daily rate. The IRS is also willing to accept an average annual rate in cases of numerous transactions. Depending on the fluctuation of foreign exchange rates, choosing the right method can yield significant tax savings. For example, assume you received a 50,000 EUR bonus on May 20, 2012. The 2012 annual average rate would translate this bonus to $61,805. However, using the daily rate for May 20, 2012, would translate the bonus to $63,914. Obviously, using the annual rate would “reduce” your income, thereby lowering your USD income and potentially saving you money on your US expat taxes.
Similar to the Foreign Tax Credit, the US has arranged tax treaties with more than 50 countries in attempt to avoid dual taxation of US citizens on their US expat taxes. Generally, the treaties attempt to allocate an individual’s income only to the source of earnings. You can obtain detailed information from IRS Publication 901. Publication 901 has information on the provisions of each of the treaties and explains how they affect your US expat taxes.
As an expatriate, you are still entitled to Social Security benefits. The United States has developed agreements with 24 countries in an attempt to reduce dual taxation. These treaties also ensure benefit protection for recipients. The Social Security Administration has issued a publication which specifically can help expatriates. This publication helps expats manage their social security benefits and better understand the link to their US Expat Taxes. Country specific information is also available on the Social Security website.
Each of the 50 states is different in how they determine the filing requirements of your US expat taxes. Some states have no personal income tax at all, such as Florida, Texas and Washington. However, other states, such as California and Virginia, consider whether you have retained certain rights as a US citizen. These rights include ownership of assets, financial accounts and a driver’s license. These are used to determine your future “intent.” If they determine that you intend to return to the state, they may still require you to file an expatriate tax return.
More Questions About Your US Expat Taxes?
Check out the next post in our series on five tax-related items you should take into account before your move abroad. If you have any more questions about your US expat taxes or would like help with your expatriate tax preparation, please contact us.