A comprehensive guide to American Taxation for US citizens living abroad

US residents referred as expats are required to file US income tax returns just like any other individuals living in the USA.

The American tax for US residents living abroad has different tax obligations because of their international status.

For IRS both expats and American residents living in the country are both same when it comes to taxation. So, if you are an US expat, you are required to file an income tax return using Form 1040 in the same way as Americans residing in USA.

WHAT IS US EXPAT TAXATION?

US Expat Taxation is the tax obligation of US citizens and resident aliens living abroad. The United States unlike most countries taxes its citizens on their global income, irrespective of where they reside. In simple words, US expats are required to file a US federal tax return and report all their foreign and domestic income.

IRS offers certain tax reliefs for US expats including Foreign Earned Income Exclusion and Foreign Tax Credit. Also, the expats have to comply with the additional reporting requirements like FBAR for foreign accounts and FATCA for foreign assets.

DO US EXPATS NEED TO FILE US TAX RETURNS WHILE LIVING OVERSEAS?

Yes, US expats must file a US tax return while living overseas if their income exceeds the minimum filing threshold, just like any US-based citizen. The United States of America taxes its citizens on their worldwide income from foreign and domestic sources.

The US Expats will have to file additional forms such as FBAR for foreign financial accounts exceeding $ 10,000. They may be eligible for tax benefits like FEIE and FTC to reduce or eliminate double taxation.

Do Expats have Tax Exemption?

US citizens living abroad are eligible for Foreign Earned Income Exclusion or the Foreign Tax Credit. The FEIE allows one to exclude a certain amount of foreign earned income from US taxation. The FTC provides a credit for taxes paid to foreign country that can offset the US tax liability.

What are the key tax forms does expat have to file?

The key tax forms for US citizens living abroad include

• Form 1040, is the standard US individual income tax return used to report worldwide income.
• Form 2555 is used to claim the foreign-earned income exclusion to exclude foreign income,
• Form 1116 helps the US expats claim the Foreign Tax Credit to avoid double taxation on foreign income.
• FBAR (FinCEN Form 114) needs to be filed by the expats if their accounts exceed $ 10,000 in aggregate.
• Form 8938 under FATCA to report foreign assets exceeding specific thresholds.

These forms help US expats meet their US tax obligations and avoid penalties.

WHAT IS FOREIGN EARNED INCOME EXCLUSION (FEIE)?

FEIE is a provision allowing US expats to exclude a certain amount of their foreign-earned income from US taxation. The exclusion limit for 2024 is $ 120, 000. To qualify, the expats must meet either the Bona Fide Residence Test or the Physical Presence Test. The FEIE helps prevent double taxation on income earned abroad, though it does not apply to income such as pensions or investment gains.

Paying Expat Taxes on Money Earned Abroad

1. Form 1040 – Expats must report their world-wide income including the one earned abroad. This includes income from employment, self-employment, investments, rental properties, and other sources of income.
2. Claim exclusions and credits: Expats if they are eligible can use various provisions to eliminate or reduce US taxes on their foreign earned income. The most common is FEIE that allows one to exclude a certain amount of foreign income from US taxation. They can also claim Foreign Tax Credit in one has paid taxes to foreign government on same income.
3. Report foreign financial accounts: If expats have foreign bank account or other financial assets that exceed certain limits they have to file FinCEN Form 114 and IRS Form 8938 to report these assets.
4. File state income tax: Based on US state of residence and the state tax laws, one may need to file state income tax returns on the foreign earned income.

Declaration of income from abroad

To declare income earned abroad one must report on their US tax return. This includes income from employment, self-employment, investments, rental properties and other sources. The expats will need to provide detailed information about their foreign income including amount, source and currency.

Foreign Tax Credit and Double Taxation for the US ex-pats

The Foreign Tax Credit allows US expats to reduce their US tax liability by the amount of foreign taxes paid on the same income. This helps avoid double taxation. Double taxation occurs when the same income is taxed both by the US and a foreign country. The US expats can claim FTC using Form 1116, providing a dollar-for-dollar credit for foreign taxes paid. The credit applies to war profits, income, and excess profit taxes, but not other taxes like VAT or sales taxes. FTC along with FEIE helps maximize tax burdens for US citizens living abroad.

What are the tax deadlines and extensions for US expats?

The tax deadline for US expats is the same as for US-based citizens, April 15. However, expats receive a two-month extension to file their tax return, which makes June 15 their final deadline. If the US expats need more time, they can request for additional extension to October 15 by filing Form 4868. It is important to note that while the filing deadline may be extended, any taxes owed are still due by April 15 to avoid interest and penalties. Expats can until October 15 file FBAR, with an automatic extension if required.

Do US expats have to pay state taxes?

US Expats may have to pay state taxes depending on their state residency before moving abroad. Some states like California and New York have strict residency rules and may continue to tax expats unless they can prove they have cut ties with the state. Other states like Florida or Texas have no state income tax, making it easier for expats to avoid state tax obligations. To determine liability, ex-pats should verify their residency status with their state tax authority as rules vary with states.

What are the Self-Employment and Freelancing Taxes for US Expats?

The US expats who are freelancing or self-employed must pay self-employment taxes, a total 15.3% of net earnings. The tax applies even if they qualify for FEIE. However, if the expat’s host country has a Totalization Agreement with the US, they may be exempt from US self-employment taxes and instead pay into the foreign country’s social security system.

also read:- How much foreign income is tax –free in USA?

HOW TO AVOID COMMON EXPAT TAX MISTAKES?

• US Expats need to file their tax returns on time. They need to know deadlines and extensions.
• They need to include both US and Foreign Income.
• The expats need to use the FEIE and FTC to avoid double taxation.
• They have to report foreign accounts and assets when required.
• The ex-pats have to understand their former state’s obligations.
• They have to maintain physical records to qualify for the Physical Presence Test.
• Consult a professional expat tax advisor familiar with the expat tax laws.

How to Avoid Double Taxation?

One of the main concerns of expats is to avoid double taxation- taxed by both the US and the foreign country where they have settled and earn their income.

To avoid double taxation, tax specialists develop strategies that optimize the use of tax credits and exclusions including FEIE and FTC for their clients.

The American Tax for US residents living abroad is complex. Any flaws or delay in filing the expat returns can invite huge IRS fines. It is therefore advisable to collaborate with a professional expat tax expert to help you navigate the expat tax matters easily.

What are the Tax Planning Tips for US Expats?

• US Expats can use their Foreign Earned Income Exclusion to reduce taxable income.
• They can offset US taxes with Foreign Taxes Paid.
• US expats need to open their foreign bank accounts wisely and stay under the $ 10,000 FBAR threshold if possible.
• Avoid double social security taxes with qualifying agreements.
• They need to know the tax residency obligations in the US and their host country.
• They must ensure they meet the Physical Presence Test for tax benefits.

US Expat taxes can be challenging, it is thus advisable to consult a professional tax help to manage your expat taxes. The professional US expat tax professionals help navigate the intricacies of filing requirements like FEIE, FBAR, and FATCA, ensuring compliance with both US and foreign tax laws. The expat tax experts help minimize tax liabilities, avoid penalties, and optimize the tax situation by taking advantage of available tax relief options. They ensure the expats file their expat taxes accurately and maximize tax benefits, preventing costly mistakes.

FAQs

1. Does USA expats have to file tax returns with the IRS?

Yes, expats have to file tax returns with the IRS as their income earned at any part of the world is taxable.

2. Can IRS track foreign income?

Yes, IRS has mechanism to track foreign income and financial accounts of their citizens including expats.

3. Can expats avoid double taxation?

Yes, they can by using tax credits, exclusion that includes FEIE and FTC.