The United States is one of the few countries that taxes citizens on foreign income, even money earned abroad while living abroad. As an American expat, you will likely need to file taxes both in the United States and in your host country. This article is intended to give you a brief introduction to the key areas of your US expat taxes.
Dates for Filing
While the typical US filing deadline is April 15, Americans living abroad receive an automatic extension until June 15. However, all taxes on foreign income still need to be paid by April 15 to avoid penalties or interest. Additional extensions may be requested via Form 4868 or Form 2350 (if you need more time to meet the Physical Presence Test).
Foreign Bank Accounts
Americans who have financial authority over one or more foreign accounts may need to file the FBAR if the cumulative balance of these accounts exceeded $10,000 at any one time during the calendar year. Form TD 90-22.1, Report of Foreign Bank and Financial Accounts or FBAR, must be received by the US Department of Treasury on June 30. There are no extensions for the FBAR, even if you have an extension on your US expat taxes.
Tax Savings on Foreign Income
Foreign Earned Income Exclusion
Qualifying US citizens living abroad may elect to exclude up to $97,600 of their foreign income on their 2013 US expat taxes (or up to $95,100 for tax year 2012). This exclusion is claimed on Form 2555, and attached to Form 1040 with your US expat taxes. This exclusion also impacts the Foreign Housing Allowance, which enables you to deduct 30% of the Foreign Earned Income Exclusion you claim on qualified housing costs in a foreign country. In higher cost cities you may be able to exclude even more of your foreign housing costs, based on the IRS cost of living estimates.
Foreign Tax Credit
It is likely that you will need to pay taxes in your host country as well as the United States while living abroad. The Foreign Tax Credit is designed to reduce the burden of double taxation on your foreign income. US citizens may elect to claim a credit for foreign income taxes paid.
Other Key Information
- Dual Taxation and Social Security – The US has arranged tax treaties with more than 50 countries in an attempt to avoid dual taxation of US citizens on their foreign income and has agreements with many countries about Social Security taxes and benefits. You can obtain detailed information on how tax treaties impact expat taxes from IRS Publication 901, and can find country specific information on the Social Security Administration’s website.
- Married to Non-US Citizen – A US citizen and their non-citizen spouse may choose to file jointly if both spouses elect to treat the spouse as a resident (remember that you will have to file jointly on future returns as well). While this election allows the US to tax the non-US spouse’s foreign income, it also allows the Foreign Earned Income Exclusion to be utilized by each spouse.
- State Taxes – Each state determines their own filing requirements for US citizens living abroad. It’s important to check with your last state of residence to learn whether you are expected to file returns on foreign income.
If you are behind with your tax returns, you are not alone. Many US expats are unaware they must report foreign income to the IRS and fear the worst – big fees and penalties – when they realize they are behind. The good news: The IRS has programs set up to allow late filers to catch up while minimizing the possible penalties they will owe. Two such programs are the Offshore Voluntary Disclosure Program and the newer streamlined process for late filers.
Confused by Expat Taxes on Your Foreign Income?
If you have any questions about your expat tax obligations, or if you’d like to help completing your returns, please contact the Greenback Expat Tax Services team.
About Greenback Expat Tax Services
Greenback Expat Tax Services specializes in the preparation of US expat taxes for Americans living abroad. Greenback offers straightforward pricing, a simple, hassle-free process, and CPAs and EAs who have extensive experience in the field of expat tax preparation. To learn more, visit our website at www.greenbacktaxservices.com.