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.
To make sure you don’t face a hefty fine, read on for a rundown of your rights and obligations if you have moved away from the US, including the following topics:
- An overview of US taxes
- 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
US taxes can be daunting, especially when filing from abroad. That’s why MyExpatTaxes offer trusted software and professional help to file your US taxes. Whether you’re a business owner, a digital nomad, or retired, they have a solution – no matter how complicated your situation. Make filing simple with MyExpatTaxes.
An overview of US taxes
The US is one of the few countries in the world that applies its tax laws to citizens overseas on their worldwide income. If you’re a US national, you have the same tax filing requirements whether you live in the US or abroad.
However, there are allowances and credits that prevent US expats from paying tax on their overseas income twice. If you live in another country, you must be aware of US tax filing requirements so that you’re taxed properly by the US authorities.
Whether you’re a US resident or not depends on how you qualify under the Substantial Presence rules. You are 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 2022 range from:
- 10% on income up to $10,275 (or $20,550 on a joint married income), rising to a top rate of
- 37% on income over $539,901 (or $647,851 on a joint married income)
See more information on US income tax rates on the Internal Revenue Service (IRS) website.
The IRS is responsible for administrating and collecting taxes in the US. The tax year runs from 1 January to 31 December. US residents and Green Card holders need to file their returns by 18 April 2023 for the 2022 tax year.
Americans 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 six months are possible. However, any tax payments made later than 15 April are subject to interest.
Tax filing obligations for US expats
Although many US expats don’t owe tax on their income, it’s 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 $12,950) 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 must declare all worldwide income on your annual statement including:
- Salaries and other income streams (e.g., rental income, pensions) earned in the United States 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 $10,000 or more
- Stock bought in another currency if the value of that currency gains significantly against the US dollar during the tax year
If you are a US citizen and you choose to renounce your US citizenship or end your long-term residence status, you are liable for Expatriation Tax, which is applied to the value of your property.
You will need to inform the IRS and complete Form 8854. Read more about the rules and requirements for this on the IRS website.
Organizing your income when leaving the US
You might want to think about any tax implications to your income when leaving the country. Certain things such as salaries or property taxes are tied to specific locations. Movable assets such as cash investments are different.
Depending on the country you are moving to, tax levels may be higher or lower than in the US. But you also need to bear in mind that foreign assets above a certain value need to be declared to the IRS and may incur taxes if your worldwide income is above a certain amount.
Because of this, it’s a good idea to talk about your financial situation with a tax advisor. This way, you can plan your finances ahead of your move without being hit with any unnecessary tax bills.
Filing US taxes abroad
If you are liable for a US tax return, you will need to file the IRS Form 1040 (PDF). Send it by mail to:
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215
Alternatively, you can file your return electronically using one of the following online tools:
You need a US social security number or tax ID number, which you should provide on the forms along with other personal details, income, and allowances/deductions.
Don’t forget that all figures need to be provided in US dollars ($). Be aware of exchange rates between currencies.
See the IRS website for full details of filing requirements.
Reducing your liabilities when filing US taxes abroad
Although Americans abroad have to declare income to the IRS, there are several credits and deductions available that mean most people won’t owe any taxes. These include the following:
- Foreign Earned Income Exclusion (FEIE) – a tax-free allowance ($120,000 in 2023) 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 bank 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 the best use of your assets.
Paying US taxes abroad
The deadline for payment of US taxes is 18 April. Even if you have left the US and made use of the filing extension, any tax owed for the tax year should still be paid in April. Interest will be charged on payments made after this date.
There are several 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 the United States Treasury
- Credit or debit card
If you owe tax and you are unable to make the payment in full, contact the IRS as soon as you can to discuss making payments in installments.
Late returns in the US
Americans who have left the US 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 four-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 it 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 $450 or 100% of your unpaid tax, whichever is less
Returning to the US
If you decide to move back home to the US after a period spent living abroad, you need to inform the IRS. Your tax filing requirements (and allowances, deductions, etc.) will change back to that of a US resident as a result.
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 18 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.