US Tax Filing requirements for expats in the UK, Canada and Australia

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If you are a US Citizen or a Green Card Holder living in the UK, Canada or Australia, you might be wondering about your tax obligations. US Expat Tax Filing can seem challenging for many.

The US Tax system is unique in that it taxes citizens and resident aliens on their income earned in any part of the world, regardless of where they live. This comprehensive guide will help the US expats navigate into the specific tax filing requirements for US expats residing in the United Kingdom, Canada and Australia, helping them stay compliant without unwanted stress.

The important question that arises in the mind of every expat residing in the UK, Canada and Australia is do I have to file a US Tax Return if do not live in the US.

The answer to this is – Yes, you have to. As a US citizen or a resident alien, you are required to file a US tax return every year once your income exceeds the filing thresholds, no matter where you live.

I owe nothing; do I still need to file my return with the IRS?

Filing US taxes from abroad is mandatory for every US citizen, irrespective of where they live. While you may not owe any US taxes due to provisions like Foreign Earned Income Exclusion and the Foreign Tax Credit, you are obligated to file a return to claim these benefits. Failing to file can result in penalties and the loss of these valuable exclusions and credits.

The Taxes filing requirements of US Expats living in UK, Canada and Australia

As a US Expat, you will have to file a US tax return annually, reporting your global income to the IRS- even if all of the income was earned outside the United States.

  • Income Thresholds: Income thresholds are important to determine if the US Expats need to file their returns with the IRS. US citizens and resident aliens must file if their income exceeds certain limits, which vary based on filing status and age.
  • Additional Forms: The US Expats need to file additional forms. Form 2555 is used to claim the Foreign Earned Income Exclusion (FEIE) allowing the expat to exclude up to $ 120, 000 of foreign-earned income from the US taxation. Form 1116 for the Foreign Tax Credits (FTC), which offsets US tax liability with the taxes paid to the UK.
  • Foreign Bank Account Reporting (FBAR): If the combined balance of the foreign financial accounts of the US expat exceeds $ 10,000 at any time during the year, they are required to file an FBAR using FinCEN form 114.
  • Deadlines for filing returns: The standard deadline is April 15 but there is an automatic extension for expats to June 15. The expats can also obtain an additional extension to October 15 by filing Form 4868.
  • Reporting of Foreign Financial Assets: If the US expats have specified foreign financial assets exceeding certain thresholds they need to file Form 8938 to report them.
  • Social Security and Self-Employment Tax: If the US expat is self-employed they may still owe US self-employment tax even if they do not owe income tax. The Totalization Agreement between the US and countries will exempt the expat from double social security taxation.

Country-Specific Tax considerations

Each country has its unique tax treaty reporting requirements and nuances that the US expats should know.

United Kingdom

The United Kingdom operates on a residency-based taxation system. The tax obligations depend on the residency status. The UK uses the Statutory Residence Test to determine residency. The factors include the number of days spent in the United Kingdom, ties to the country and the employment status. The US Tax treaties with UK, Canada, Australia aims to prevent double taxation. For instance the US Social Security benefits are taxable only in the US while the UK pension distributions are generally taxable only in the UK.

US Tax treaties with UK

The National Insurance Contributions (NICs) resonates the US’s Social Security Taxes. The US-UK Totalization Agreement ensures that the expats need not pay into both the systems simultaneously. UK pension scheme’s may have different tax treatments under the US law. It is important to understand how the specific pension is classified to ensure proper reporting and taxation.

Canada

Like the UK, Canada also employs a residency –based taxation system. To determine the residency, Canada considers factors like permanent home, family ties and economic connections. The US –Canada tax treaty provides mechanisms to avoid double taxation. Certain types of income are taxable only in the country and foreign tax credits can be applied. Canadian accounts like Tax-Free Savings Accounts and the registered retirement security plan have specific US tax implications. The Tax-Free saving accounts are not recognized as tax-free in the US and the Retirement Savings Plan, if properly reported can receive tax deferral benefits.

US Tax treaties with Canada

The US-Canada Totalization Agreement helps prevent dual contributions to the Social Security Systems.

Australia

The tax system of Australia is based on the residency and source of income. Australia determines tax residency according to physical presence, intention and behaviour. Even if you are a non-resident for Australian Tax Purposes, you may still have the obligations according to the income sourced from Australia.
The Australian tax treaty provides relief from double taxation and clarifies taxing rights over various income types. Australia’s mandatory requirements savings system; known as superannuation; has specific US tax reporting requirements. These funds may be considered foreign trusts under US laws, requiring additional forms like Form 3520.

Australia imposes a Medicare levy to fund its public healthcare system. The US-Australia Totalization Agreement ensures the expats do not pay into both countries’ social security simultaneously.

Strategies to avoid double taxation

  • Foreign Earned Income Exclusion (FEIE): By meeting the bona fide residence or physical presence test, the expats can exclude a significant portion of foreign-earned income from US taxation.
  • Foreign Tax Credit (FTC) for US expats: This credit allows the expats to offset the US tax liability with the taxes paid to the expat’s country of residence. This is beneficial in countries with higher tax rates.

What are the common tax forms for US expats living in the UK, Canada and Australia?

  • Annual Federal Tax Return (Form 1040): If your income exceeds the standard filing threshold, the expats must file a federal income tax return(Form 1040). These thresholds vary depending on their filing status and age.
  • Foreign Earned Income Exclusion (Form 2555): This form allows the US expats to exclude up to $ 120,000 + adjusted annually for inflation of foreign-earned income if they qualify under the physical presence test (330 days in a foreign country within 12 months) or the Bona Fide Residence Test.
  • Foreign Tax Credit (Form 114): If the aggregate foreign bank account balances of the expats exceed $ 10,000 at any point during the year, they must file an FBAR.
  • FBAR requirements for US expats: If the aggregate foreign bank account balances exceeds $ 10,000 at any point during the year, the expats must file an FBAR.
  • Foreign Account Tax Compliance Act (FATCA): Under the FATCA Act, the American Citizens with significant foreign assets must report them using the Form 8938. The threshold for the expats is $ 200,000 or $ 400,000 (married jointly).

Penalties for late US tax filing abroad

For the US Expats living abroad, late filing of tax returns can lead to significant penalties even if they do not owe any US tax.

  • Automatic Filing Extension to June 15: The US expats automatically receive a two-month extension to file their federal tax return- moving the deadline from April 15 to June 15. Interest on any tax owed still begins accruing from April 15. To avoid late penalties entirely, the expats should either file or request an additional extension (Form 4868) to October 15.
  • Penalties for Late Filing: Failure to file a penalty results in the payment of 5% of the unpaid tax per month, up to a maximum of 25%. If the return is over 60 days late, the minimum penalty is less than $ 485 for the tax return due in 2024 or 100% of the unpaid tax. Failure to pay a penalty would amount to 0.5% of the unpaid taxes per month (up to 25%). This penalty continues to accrue until the tax is fully paid. If both the failure-to-file and failure-to-pay remain at 0.5% totaling 5% for that month.
  • FBAR penalties (FinCEN Form 114): The US expats with foreign bank account balances exceeding $ 10,000 at any time in the year must file an FBAR. Non-willful failure to file leads to a fine of up to $ 10,000 per violation. Willful failure- to -file leads to a fine of up to $ 100,000 or 50% of the account balance per year whichever is greater.
  • FATCA Penalties (Form 8938): If the US expat is required to file Form 8938 and fails to do so, there is an initial penalty of $ 10,000. In case of continued failure, there is an additional $ 10,000 for every 30 days (after IRS notice) up to a maximum of $ 60,000.
US expat living in Australia

IRS Tax deadlines for Expats living in Canada, the UK and Australia

If you are a US expat living in Canada, the UK and Australia, the IRS expects you to follow the specific tax deadlines. However, the US expats get some extra time to file – but they must be aware of different IRS deadlines depending on their situation.

  • April 15- Official US Tax Deadline: This is the standard filing deadline for all the US taxpayers, including the US expats. Interest on any unpaid tax begins to accrue from this date, even if they qualify for later filing.
  • June 15- Automatic Extension for the US Expats: The US citizens and green card holders living in the UK, Canada and Australia automatically get a two-month extension to file their return. The expats need not file any form to get this extension. However, this is an extension to file, not to pay. Interest on any unpaid tax starts from April 15.
  • October 15- Extended Filing Deadline: If the US expats need more time beyond June 15, they can file Form 4868 by June 15 to get an additional four-month extension. This moves their deadline to October 15.
  • FBAR Deadline- April 15: FinCEN Form 114 (FBAR) must be filed if the foreign financial accounts total over $10,000 at any time during the year. The initial deadline is April 15, but there is an automatic extension to October 15. The expats need not fill out any form to avail of this extension.
  • FATCA Reporting: If the US expats need to file Form 8938 under FATCA, it is due with their tax return. If they are using the expat extension, it is due by June 15 or October 15 if they file Form 4868.
  • State Tax deadlines: Some American states like California, New York, and Virginia may still require US expats living in Canada, the UK and Australia to file a state tax return. State deadlines are the same as the federal deadlines but the expats must check the same with each state.

How do the US expats living abroad can minimize their tax liability?

  • Utilize the treaty of their residing country with the US: The United States has entered a tax treaty with many countries including the UK, Australia and Canada to prevent double taxation.
  • Claim Foreign Credits: The foreign taxes paid by the expats in their residing country can offset income tax owed in the US through Foreign Credits.
  • FEIE and Housing Exclusion: If the expats qualify, they can exclude a portion of their foreign earned income through the FEIE. Expats with housing expenses may also benefit from the foreign housing exclusion which allows further deductions from the taxable income.
  • Reporting Foreign Financial Accounts and Foreign Assets: Expats with the foreign financial accounts exceeding $ 10,000 are required to file the FBAR. Reporting the foreign financial accounts is essential to avoid penalties from the IRS. Also, certain foreign assets need to be reported using the Form 8938 as part of Federal tax return.
  • Leverage Capital gains tax planning: The tax treaty help the expats determine which country has primary taxing rights, potentially reducing or eliminating their tax liability on capital gains.
  • Consult a professional tax advisor: Proper tax preparation for expats is important as the complicated tax requirements can lead to unpaid tax or tax withheld unnecessarily. Working with a knowledgeable tax expert will ensure compliance, helping the US expats living abroad minimize their overall tax burdens.

Looking for comprehensive expat tax support? Work with professional expat tax services who will help you navigate the process without any hassle.

FAQs

  1. Do the US expats living abroad have to file their returns with the IRS?
    Yes, the US expats have to file their tax return with the IRS if their income exceeds the filing threshold.
  2. How does the USA Expat Taxes help the expats living abroad?
    The USA Expat Taxes help the expats living abroad in tax preparation, compliance, support, and guidance on exclusions and credits to avoid double taxation.
  3. What is Foreign Earned Income Exclusion (FEIE) for US expats?
    FEIE allows US expats to exclude a portion of their foreign-earned income from the US taxation if they meet certain residency tests.