It is essential that US expats have access to adequate tax advice, as non-compliance with Federal tax law can be heavily penalised. The IRS has been known to demand up to twenty years’ worth of personal financial records while heavy fines and imprisonment are possible penalties.
For those of our clients who require US tax advice, we are delighted to formally partner Bright!Tax Tax Advisors. Bright!Tax is a multiple-award winning cloud-based US tax services firm for Americans living overseas. They have won the EMMA Award, have been named Expat Provider of the Year and are a Forbes Top 100 Tax Tweeter.
Living abroad is a great adventure and privilege, however living outside America doesn’t mean leaving the U.S. tax system. The U.S. has required U.S. citizens living abroad to file U.S. taxes since the Civil War. However the IRS only gained the ability to enforce this requirement in the last decade or so, due to a combination of the transition to global digital banking and a raft of financial information sharing agreements with foreign governments and banks. This means that it’s no longer possible to fly under the IRS’ radar anywhere, globally. That said, the majority of Americans living abroad don’t end up owing any U.S. tax, as long as they file a US. Federal tax return.
In this article from Bright!Tax, we provide an overview of U.S. filing and reporting requirements for Americans living abroad.
General U.S. filing requirements for expats
- All American citizens and Green Card Holders have to file Form 1040 every year, including those residing overseas, reporting their worldwide income. Income received in foreign currencies must be converted into U.S. dollars for reporting purposes, utilizing a recognized, mainstream conversion source.
- Americans filing from abroad receive an automatic two month filing extension, until June 15. They can request a further extension until October 15 if they need to by filing Form 4868.
- Americans abroad may also have to keep filing State taxes, depending on the rules in the state where they last lived. State rules often look at whether expats still have ties in the state, such as financial accounts, property, or dependents, or whether they intend to return to live in the state again in the future.
Avoiding double taxation
Unfortunately, the international tax treaties that the U.S. has signed don’t prevent Americans abroad from having to file U.S. taxes on their global income. Instead, to avoid double taxation, Americans must file additional forms when they file their federal tax return to claim either tax credits or a provision called the Foreign Earned Income Exclusion.
Claiming the U.S. Foreign Tax Credit gives Americans a U.S. tax credit based on the value of foreign income tax that they’ve paid abroad. For Americans paying foreign income tax at a higher rate in their country of residence, this will reduce their U.S. tax bill to zero.
Alternatively, expats can claim the Foreign Earned Income Exclusion to simply exclude the first $107,600 (the 2020 threshold) of their earned income from U.S. taxation. The threshold rises each year to reflect inflation.
Expats can sometimes claim both the Foreign Tax Credit and the Foreign Earned Income Exclusion, however they can’t apply them both to the same income.
There are other credits and exclusions available for expats too, depending on each expat’s personal and financial circumstances.
Financial account and asset reporting for expats
The first is called a Foreign Bank Account Report, or FBAR. FBARs are filed to FinCEN, the U.S. financial crimes authority, rather than to the IRS. Any American who has, in total, over $10,000 in foreign registered financial accounts at any time during a year has to file an FBAR to report all of their offshore financial accounts. Financial accounts include bank accounts and all individual investment and pension accounts. It also includes any account that an American has signatory authority over even if not registered in their name, such as a joint account, or a trust or company account.
The second requirement is for any American expat who has a minimum of $200,000 of offshore financial assets at the end of a year, or $300,000 at any time during a year, to report them on IRS Form 8938.
It’s worth knowing that almost every foreign bank and investment firm is reporting the same information to the U.S. Treasury directly, along with American account holders’ contact information, so the IRS can verify the information provided in FBARs and on Form 8938, or see if accounts haven’t been reported that should be.
Self-employment taxes for expats
Business reporting for expats