If you are a citizen of the United States, you must follow the same procedures for filing tax returns and paying income taxes whether you reside in the country or for Taxpayers American Living Abroad. All of your international income is subject to U.S. income tax regardless of where you live. If you feel in need of more information or an expert who can simplify this for you, then feel free to reach out to us at USA Expat Taxes.
The United States has a citizen-based taxation system, unlike most other nations, which have residence-based or territorial-based taxation systems. Therefore, regardless of where you live or whether you receive any income from the United States or not, as a citizen of the United States, you are obligated to file a U.S. tax return and record your global income. You must submit a tax return if your gross income exceeds the filing threshold, which varies depending on your filing status.
Numerous other nations and the United States have tax treaties. However, many of these treaties present a clause (commonly referred to as a “saving clause”). Based on the saving clause, the United States retains the authority to tax its people and residents following the terms of its tax laws, regardless of any provisions to the contrary in a tax treaty. In other words, for Americans residing overseas, the requirements of a tax treaty are practically superseded by the Internal Revenue Code.
You’ll undoubtedly need to pay income tax if you’re an American living overseas. This might result in you paying two taxes on the same income since you must pay U.S. income tax on your international income. The foreign income tax that has accumulated or been paid to the nation where you reside may be claimed as a credit on your U.S. tax return. Your overseas tax credit can fully offset your U.S. tax obligation if you reside in a nation with high tax rates.
Form 114, “Report of Foreign Bank and Financial Accounts,” is often required to be filed by U.S. citizens with a foreign bank or financial account (FBAR). This reporting obligation is in addition to and apart from any reporting that may be required on Form 8938, “Statement of Specified Foreign Financial Assets,” or Form 1040, Schedule B. The FBAR is submitted electronically through the Bank Secrecy Act filing system, not with the IRS.
U.S. citizens and resident aliens are required by federal law to record all income, including that derived through foreign trusts, foreign banks, and foreign securities accounts. Affected taxpayers must typically complete and include Form 1040, Schedule B, with their tax return. The presence of foreign accounts, including bank and securities accounts, is questioned in Part III of Schedule B. Citizens of the United States are often required to disclose the nation where each account is situated. A competent CPA may be a useful resource for any U.S. taxpayer who is moving abroad to live or has already moved abroad to file tax returns correctly. In fact, considering the difficulties involved, expert guidance is strongly advised. To learn how our international financial specialists may assist, get in touch with us.