This short guide to filing US taxes abroad explains everything expats need to know about meeting the filing requirements of the IRS
There are many misconceptions about filing and paying taxes in the United States when living and working abroad. Before you start packing your bags for a new country, be aware of how to handle your taxes back home. Expatica’s guide on filing US taxes overseas gives you a rundown of your rights and obligations, with sections on:
- US tax overview
- Tax filing obligations for US expats
- Organizing your income when leaving the US
- Filing US taxes abroad
- Reducing your liabilities when filing US taxes abroad
- Paying US taxes abroad
- Late returns in the US
- Returning to the US
- Advice on filing US taxes abroad
- Useful resources
AIT Services specializes in the preparation and filing of expat tax returns for US citizens, green-card holders and foreign nationals living in Switzerland, France and Germany. Since 2004, the firm has helped Americans minimize their tax payments and meet their obligations at competitive rates.
US tax overview
The US is one of the few countries that applies its tax laws to overseas citizens on their worldwide income. If you are a US national, you have the same tax filing requirements whether you live in the US or overseas.
However, there are various allowances and credits that prevent US expats from paying tax on their overseas income twice. If you are an American citizen who is a resident of another country, you will need to be aware of US tax filing requirements so that you are taxed properly by the US authorities.
Whether you are considered a US resident or non-resident depends on how you qualify under the Substantial Presence rules. You will be treated as a resident of the US for tax purposes if you were in the country for at least:
- 31 days of the current tax year, and
- 183 days during the last three tax years
Income tax rates in the US are progressive. Federal brackets for 2020 range from:
- 10% on income up to $9,875 (or $14,000 if head of a household and $19,750 on a joint married income or if filing as a widow), rising to a top rate of
- 37% on income over $518,401 (or $622,051 on a joint married income)
See more information on US income tax rates on the IRS’ website.
The Internal Revenue Service (IRS) is responsible for administrating and collecting taxes in the US. The tax year runs from 1 January – 31 December. US residents and Green Card holders need to file their returns by 15 April the year following the tax year.
US expats abroad who qualify as non-residents get a two-month extension and don’t have to file until 15 June. Additional extensions of up to 6 months can be requested. However, any tax payments made later than 15 April will be subject to interest.
Tax filing obligations for US expats
Although many US expats will not owe tax on their income, it is nevertheless compulsory to declare your annual worldwide income to the IRS.
However, many US nationals living abroad fail to do this. This might be because they are unaware that they have to. Alternatively, they may fear being fined for having not filed returns in previous years.
Only certain groups are exempt from filing an annual tax return to the IRS. These include anyone with an annual worldwide income below a certain threshold (currently around $12,000) or those who meet specific requirements.
You can determine whether you need to file a tax return as a US expat on the IRS website. It is also a good idea to consult with a specialist on US tax regulations. This will help to ensure you stay within legal requirements.
If you have to file an annual tax return with the IRS, you will need to declare all worldwide income on your annual statement including:
- salaries and other income streams (e.g. rental income, pensions) earned in the US and abroad;
- interest on foreign financial assets with a value above the reporting threshold (currently $50,000);
- interest on foreign bank accounts with assets valued at $10,000 or more;
- stock bought in another currency, if the value of that currency gains significantly against the US dollar during the tax year
Although you have to declare worldwide income to the IRS as a US expat, you are unlikely to pay tax if your income is below $100,000 a year. There are a number of allowances and credits that can be applied, detailed in the sections below.
If you are a US citizen and you decide to renounce your US citizenship or end your long-term residence status, you will be liable for Expatriation Tax which is applied to the value of your property.
You will need to inform the IRS and complete Form 8854. Read more about the rules and requirements for this on the IRS website.
Organizing your income when leaving the US
You might want to think about any tax implications to your income when leaving the country. Certain things such as salaries or property taxes will be tied to specific locations, but movable assets such as cash investments are different.
Depending on the country you are moving to, tax levels may be higher or lower than in the US. But you will also need to bear in mind that foreign assets above a certain value need to be declared to the IRS and may incur taxes if your worldwide income is above a certain amount.
Because of this, it’s a good idea to talk your financial situation over with a tax advisor. This way, you will be able to plan your finances ahead of your move without being hit with any unnecessary tax bills.
Filing US taxes abroad
If you are liable for a US tax return, you will need to file the IRS Form 1040. This can be sent in the post to Department of the Treasury, IRS Center, Austin, TX 73301-0215.
Alternatively, you can file your return electronically using one of the following online tools:
You will need a US social security number or tax ID number, which you should provide on the forms along with other personal details, income and allowances/deductions.
Don’t forget that all figures need to be provided in US dollars ($). Beware of exchange rates.
See the IRS website for full details of filing requirements.
Reducing your liabilities when filing US taxes abroad
Although US expats have to declare income to the IRS, there are several credits and deductions available that mean most people won’t owe any taxes. These are:
- Foreign Earned Income Exclusion (FEIE) – a tax-free allowance ($107,600 in 2020) on income earned abroad;
- Foreign Tax Credit – a credit that can be claimed on income that has already been taxed abroad, to prevent double-taxation;
- Foreign Housing Exclusion – a credit for overseas accommodation expenses, up to a certain amount;
- Moving expenses to and from the US – if you relocate because of your job or business, you may be able to claim certain moving expenses to offset your tax liability;
- Education Credits – those enrolled in education may be able to claim American Opportunity Credit, Lifetime Learning Credit or the Tuition and Fees Deduction;
- Child and Dependent Care Credit – a credit of around $3,000 (or $6,000 if caring for two or more individuals) to cover care costs for children or dependent adults if you are working or looking for work
If you are claiming FEIE or Foreign Housing Exclusion, this may have implications for your pension entitlements. See more information on the IRS website.
In addition to this, you can also look into placing any movable cash assets into an offshore banking account or tax-free savings account. It’s worth speaking to a financial advisor with expertise in US tax law to plan how to make best use of your assets.
Paying US taxes abroad
The deadline for payment of US taxes is 15 April. Even if you are a US expat who makes use of the filing extensions, any tax owed for the tax year you are reporting on should still be paid in April. Interest will be charged on payments made after this date.
There are a number of ways to make payments if you owe US tax. These are:
- through the Electronic Federal Tax Payment System (EFTPS) which is available to US bank account holders only;
- wire transfer to the Federal Tax Collection Service;
- check or money order made payable to “United States Treasury”
- Credit or debit card
You can find out more information on payment methods on the IRS website.
If you owe tax and you are unable to may the payment in full, contact the IRS as soon as you can to discuss making payments in installments.
Late returns in the US
US expats are automatically granted a two-month extension on filing their returns, giving them until 15 June. It is also possible to file for an additional 4-month extension until 15 October.
However, if you fail to send your return by 15 October – or if you don’t apply for an extension and fail to send by 15 June – you will be charged a late filing penalty. These fines are currently:
- 5% of taxes owed for every month the return is late, up to a maximum of 25%;
- if more than 60 days overdue, there is a minimum penalty of $210 or 100% of your unpaid tax, whichever is less
The penalty for late tax payments is 0.5% of tax owed for every month the payment is late, up to a maximum of 25%.
Returning to the US
If you decide to repatriate to the US after a period spent living abroad, you will need to inform the IRS and bear in mind that your tax filing requirements (and allowances, deductions, etc.) will change back to that of a US resident.
Those moving back to the US partway through a year will need to calculate their FEIE for that tax year. This will be prorated based on the number of days spent living outside the US.
You will be able to carry over any unused Foreign Tax Credit for up to 20 years. State tax laws on foreign income vary, so check ahead with the IRS or a tax advisor if you are unsure what the tax situation is with any foreign streams of income you have when moving back to the US.
Finally, don’t forget that you will no longer be eligible for the two-month tax return extension when you move back to the US, so you will have to file your annual return by 15 April unless you apply for an extension.
Advice on filing US taxes abroad
For effective tax planning on your income, you should seek advice from a US tax expert as well as an advisor who knows about the tax requirements in your new home country. Alternatively, you can speak to a company that advises expats on global tax affairs.
Here are some useful sources of tax advice for US expats abroad:
Internal Revenue Service (IRS) – US tax authority with information on the requirements for US nationals living overseas