US Expat Taxes: A Complete 2023 Guide
Are you an American living abroad or considering a move to another country? If so, you will need to be aware of how the US taxes its citizens overseas. Unfortunately, the US tax code is nothing if not complex—especially for expats. To help clear up these complex requirements, we’ve put together a simple list of facts everyone should know about taxes for expats.
Let’s get started!
- American citizens must file a US Federal Tax Return no matter where they live in the world.
- Several tax credits and deductions are available to help expats reduce or erase their US tax bills, such as the Foreign Earned Income Credit and the Foreign Tax Credit.
- Expat tax returns are due on June 15, but extensions are available if you need more time to file.
- Failing to file your expat taxes as required could result in severe penalties.
Expat Tax Filing Requirements
Expats Are Required to File a US Tax Return
Do expats file US taxes? Yes, every US citizen is required to file a US Federal Tax Return as long their income exceeds the minimum filing threshold. (Your filing threshold is determined by your filing status.) Even if your income does not exceed the threshold for your filing status, you may still want to file. For example, you will likely have to file a return in order to claim certain tax credits or receive a refund.
Most Expats Do NOT Have to Pay US Taxes
While nearly all expats must file a US tax return, most will not end up owing US expat taxes. The US has several deductions, exclusions, and credits available to ensure that Americans living abroad aren’t taxed twice on the same income. By using these tax benefits, many expats can erase their US tax bills entirely. However, to qualify for these benefits, you must meet certain standards. (More on that below.)
You May Need to File a State Tax Return While Living Abroad
Some expats are also required to file a State Tax Return after moving abroad. This is determined by whether you are still considered a resident for tax purposes. Each state has its own rules for determining residency, and some make it very difficult to remove yourself from their tax jurisdiction. For example, even if you live in another country, a state may impose taxes if:
- They issued your current driver’s license or ID card
- You have a spouse or child living there
- Your vehicle is registered there
- You’re registered to vote there
- You have a bank account open there
- You own property there
- You maintain a mailing address there (even if you’re using a friend’s or relative’s address)
On the other hand, many states will consider you a non-resident as soon as you move away. You can visit your state’s official website to learn more about its residency standards.
Regardless of your State residency status, you do have to file a state return if you earn income from within the state. This typically results from having property you rent to others in a state or if own a business that operates in the state.
How to Save on Your Expat Taxes
Reduce or Eliminate US Taxes with the Foreign Earned Income Exclusion
One of the most common tax benefits for expats is the Foreign Earned Income Exclusion (FEIE). The FEIE lets you exclude a certain amount of foreign income from US taxation. The amount you can exclude is indexed to inflation, so it increases each year as inflation rises.
For tax year 2022, the foreign earned income exclusion amount was $112,000. For tax year 2023, that cap will increase to $120,000. If you are married, then both you and your spouse can each qualify for a $12,000 maximum exclusion for a total of $240,000.
To use the FEIE, you must qualify under either the physical presence test or the bona fide residence rest.
- The physical presence test requires that you are physically present inside a foreign country for 330 days out of any 365-day period.
- Under the bona fide residence test, you must have lived overseas for at least one calendar year and have no immediate intention of moving back to the US.
You can claim the FEIE by filing Form 2555. Once you claim this tax benefit, it remains in effect, and you will include it on your expat tax returns each year thereafter. However, should you decide that you no longer want to use it, you cannot claim the exclusion for the next five tax years without the approval of the IRS.
As an expat, you should always track your time abroad carefully. Both the physical presence test and bona fide residency test are based on the amount of time you spend overseas. If you spend too much time in the US—or cannot prove your time spent abroad—it could cost you thousands of dollars on your US expat tax return!
The Foreign Tax Credit Is Another Way to Lower Your US Expat Taxes
Another option for reducing or eliminating your US expat taxes is the Foreign Tax Credit. The Foreign Tax Credit is a dollar-for-dollar credit based on any foreign income taxes you have paid or accrued.
For example, if you owe $20,000 to the IRS but paid $15,000 in foreign income taxes, you could claim a $15,000 Foreign Tax Credit and lower your US tax bill to just $5,000. If your foreign income tax bill is larger than your US taxes, you may be able to erase your US tax bill completely.
To claim the Foreign Tax Credit, you must file Form 1116. It is not possible to use both the FEIE and the Foreign Tax Credit on the same income. This prevents “double-dipping” in the eyes of the IRS. However, you can apply each option to different streams of income—and it may be smart to do so, depending on your tax situation.
Not sure if you should use the FEIE or Foreign Tax Credit? Schedule a tax consultation with Greenback to get expert, personalized advice.
Expats Can Reduce Their Taxes Further Through the Foreign Housing Exclusion
The Foreign Housing Exclusion lets expats deduct foreign housing-related expenses from their US tax bill. Qualifying expenses may include:
- Utilities (but not phone or TV related expenses)
- Homeowners insurance
- Parking fees near your home
The Foreign Housing Exclusion is only available if you also claim the FEIE. You will use Form 2555 to claim both.
Expat Parents Can Claim the Child Tax Credit
Expats with dependent children who are US persons (citizens or permanent residents) may be eligible to claim the Child Tax Credit. This gives parents a maximum credit of $2,000 per qualifying child. This credit is partially refundable as well—up to $1,500 per child. (Income limits do apply.)
In addition to the Child Tax Credit, you may also be able to deduct childcare costs using the Child and Dependent Care Credit. However, you must have earned income to use this credit. Salaries and wages are examples of earned income.
For taxpayers who can claim the Child Tax Credit, using the Foreign Tax Credit rather than the FEIE will often yield better overall tax savings.
Tax Treaties Help Prevent Double Taxation for US Expats
Currently, the US has tax treaties with 69 countries. These treaties are designed to reduce double taxation by clarifying which country has the right to tax an expat.
However, it’s worth noting that almost every US tax treaty contains a “saving clause” that reserves the right of each country to tax its own citizens—almost as if the treaty didn’t exist. For US expats, this often means that tax treaty benefits can’t be used to erase your US tax bill.
With that said, many tax treaties still provide options to reduce taxes for expats. We recommend always consulting with a tax professional who can advise you on your options.
Renouncing Citizenship May NOT Help You Avoid US Taxes
Some frustrated expats consider renouncing their citizenship to avoid the burden of filing US taxes. But before they can do so, they must prove that they have complied with their US tax requirements for at least five years prior to the date of renunciation.
If you are considering this option, please note that depending on your income and net worth, you may be subject to an exit tax when you renounce. The exit tax is almost always applied only when your net worth is over $2 million. You also have to consider if you will have to continue filing US tax returns after expatriation, in which case you are typically taxed at a flat 30% tax rate on any income earned from the US.
Filing Taxes as an Expat
Expats Receive an Automatic Tax Filing Extension Until June 15
Expats have the same tax deadline as taxpayers living in the US (typically April 15).
If you miss that deadline while living abroad, it is automatically extended to June. Any taxes you owe must still be paid by the original deadline to avoid penalties and interest.
If you need even more time, you can request an additional extension by filing either Form 4868 or Form 2350, depending on your needs.
Failing to File Can Result in Severe Penalties
If you owe taxes and fail to file an expat tax return, you could incur late fees and penalties for each month your tax return and/or tax payment are late. Serious tax evaders and major delinquents can face severe repercussions for their actions.
The IRS can revoke the passport of a US citizen who owes taxes, or
ver even press criminal charges that can result in jail time.
Use the Streamlined Filing Compliance Procedure to Catch up on Taxes
Many expats only discover that they had a US filing requirement years after they have moved abroad. Fortunately, the IRS provides an amnesty program to help expats come into compliance without facing any penalties. It’s known as the Streamlined Filing Compliance Procedures.
To use this program, all you have to do is:
- Self-certify that your failure to file was an accident, not a willful refusal
- File the last three delinquent income tax returns and pay any delinquent taxes you owed during that time (with interest)
- File Foreign Bank Account Reports (FBARs) for the last six years
In most cases, this will bring you into compliance with IRS regulations. It’s the perfect program for expats who were unaware of their US tax filing obligations.
You Can Amend a Previous US Tax Return if You Made a Mistake
Mistakes happen. If you have failed to report some income on your return, or if you didn’t take all the deductions allowed, you can file an amended return for that tax year using Form 1040-X.
Additional Reporting Requirements for Expats
You Must File an FBAR if Your Foreign Account Balances Exceed $10,000
If the combined balance(s) of all your foreign bank accounts is $10,000 or more, you must file FinCEN Form 114, better known as the Foreign Bank Account Report (FBAR). This is true even if your account(s) only hit $10,000 for one day (or one minute!) during the year.
When calculating your FBAR liability, you will need to factor in foreign bank accounts, pensions, and investments, as well as accounts that you don’t own but have signature authority over—such as an account belonging to a parent or other relative that you can access.
The initial deadline for the FBAR is April 15 (just like with your tax return), with an automatic extension to October 15.
You May Also Need to File a FATCA Report
Under the Foreign Account Tax Compliance Act (FATCA), US citizens who own foreign assets valued above certain thresholds must file Form 8938, better known as a FATCA report.
The value threshold varies based on your filing and residency status. FATCA and FBAR filing requirements are similar but separate. You could be required to file either or both, depending on your situation.
Social Security and Retirement
You Can Still Receive Social Security Benefits When You Retire Abroad
If you are considering retiring abroad, rest assured that you can collect your Social Security benefits in just about any country in which you choose to live. There are only a handful of countries where you typically cannot receive Social Security benefits, namely:
- North Korea
However, even if you live in one of these countries, you can still collect any back payments owed to you once you move to a different country. For example, let’s say you moved to Cuba. While living in Cuba, you would not be able to receive US Social Security payments. But if you moved to Costa Rica a few years later, you would be eligible to collect any Social Security payments you were denied during your time in Cuba.
Totalization Agreements Determine Which Country You Pay Social Security Taxes To
The US has totalization agreements with 28 countries outlining which party should receive your Social Security tax payments. These agreements generally allow for the credits you earn in one country to be usable for the calculation of benefits in the other. This is an important point as, without such an agreement, you could be forced to pay into two systems—and only receive one benefit!
Special Circumstances and Tax Situations
Buying and Selling Foreign Real Estate Creates Tax Implications
The tax rules for buying and selling foreign property are mostly the same as for property located in the US. You will not have to report the purchase of foreign real estate. If you sell your personal residence at a loss, you will not have to report the sale. If you sell it for a profit, you must report it, and you may be subject to a capital gains tax.
If you sell rental property, you must report the sale regardless of whether it results in a gain or loss. Any rental income you receive must also be reported on your annual tax return.
Expat Entrepreneurs Are Required to Pay a Self-Employment Tax
In addition to income taxes, you must also pay the self-employment tax, even while living abroad. This tax is designed to replace the Social Security and Medicare taxes that would typically result from an employer-employee relationship. The rate for the self-employment tax is 15.3%. This requirement cannot be erased through the FEIE or the Foreign Tax Credit. (However, the many expat tax benefits available can still help you lower your US tax bill.)
The structure of your business will impact your expat tax liability. For example, an LLC will be taxed differently from a corporation. An expat tax professional can help you make the right choice for your situation.
Digital Nomads Are Governed by the Same Rules as other Expats
Digital nomads travel from place to place, working on the go. Most are self-employed, though not all. Regardless, the rules for digital nomad taxes are typically the same as any other expat. For example:
- All digital nomads must file a US Federal Tax Return.
- Some may need to file a State Tax Return.
- Self-employed digital nomads are also responsible for paying the self-employment tax.
- Digital nomads can claim the various expat tax benefits available if they are otherwise eligible.
However, the digital nomad lifestyle does create some unique tax implications. Specifically, traveling from place to place without establishing a domicile can complicate the expat tax process. If you are a digital nomad, a specialized tax professional can help clarify your tax obligations.
The Next Steps for Your US Taxes for Expats
Now that you’re up to speed on the rules for US expat taxes, you will want to complete these steps to remain compliant and optimize your tax bill:
- Learn your tax filing requirements and make a plan to fulfill them
- Keep track of all important tax-related information throughout the year to make it easier to file on time
- If necessary, use the Streamlined Filing Compliance Procedures to get caught up on your expat taxes
- File a US Federal Tax Return every year (along with any other expat tax forms you are required to file!)
We do not recommend doing this alone. It’s always best to consult qualified specialists when filing your expat taxes.
At Greenback Expat Tax Services, we help Americans around the world file their expat taxes accurately and on time.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on US expat taxes or working with Greenback, contact our Customer Champions!