Expatriate tax preparation can be frustrating when you can’t find up-to-date information. And finding accurate, easy-to-understand info can be quite difficult. The US 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 US and in your host country. Below, you’ll find a brief introduction to the key areas of US taxes and how these elements affect your expatriate tax preparation.
Expatriate Tax Preparation and the FEIE
Qualifying US citizens who live and work abroad may elect to exclude up to $105,900 of foreign earned income from their 2019 US expat taxes and $103,900 for 2018. 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 tax return. This exclusion also allows you to deduct part of your foreign housing costs. This is based on 30% of the FEIE; but note that this amount is increased in high cost locations such as London, Paris, Hong Kong, and others.
Foreign Tax Credit
A US citizen’s residence in a foreign country may trigger taxation in the foreign country as well as the US. 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 one year or forward for up to ten 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) each year. This form is filed separately from your US expat taxes, and is under the purview of the US Department of Treasury.
Married to Non-US Citizen
A US citizen may elect to file jointly on their 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 IRS via Form W-7 is what you use to apply for an ITIN. The processing of the ITIN application can take up to six weeks, so it’s important to apply before well before the US expatriate tax preparation deadlines.
Dates for Filing
US citizens are required to file their tax returns by April 15 or thereabouts each year. The deadline is usually April 15, but this 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 two-month extension. Despite the automatic extension, all taxes owed still need to be paid by April 15 to avoid any penalties or interest.
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Getting an Extension for US Expatriate Tax Preparation
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 15 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.
Effects of Foreign Exchange
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. If using the annual rate would “reduce” your income, and thereby lower your USD income, this could potentially save 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 with their US expatriate tax preparation. 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 expatriate tax preparation.
As an expatriate, you are still entitled to Social Security benefits. The US has developed Totalization Agreements with many countries in an attempt to reduce dual taxation. These treaties also ensure benefit protection for recipients. 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 expatriate tax preparation. 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 driver’s licenses. 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 Expatriate Tax Preparation?
If you have any questions about your taxes while living abroad or would like help with your expatriate tax preparation, please contact us.
Editor’s note: This article was previously published on April 7, 2011 and updated on September 27, 2019.