Here is a very quick guide to the top ten most frequently asked tax questions for US Expats living abroad.
Warning: The information provided here about US Expat taxes is general and introductory in nature. US Expat taxes are complicated and we recommend hiring a tax professional to help you with them. Do not apply this information to your tax return filing or tax planning without first verifying how the tax code affects you and your personal situation. Be sure to read the IRS publications and form instructions.
US Expat Tax Question #1 – Do I have to file a US tax return?
The tax code for US persons (citizens or permanent residents) require that you file a US tax return according to the same rules and income thresholds – just as if you were residing in the United States. Though it may be excluded from tax, you still must report all of your worldwide income – even if it has no US source whatsoever.
To start in figuring this out, check out this link (it opens in a new tab). This is a quick algorithm to see if you are required to file.
For US Expats, however, income thresholds are not the only deciding factor on whether or not you are required to file a tax return.
You also may be required to file based on foreign business ownership, such as with a non-US partnership or corporation. Also you may have to file if you exceed certain thresholds in your non-US accounts. Finally, you may have filing requirements for trust ownership, distributions, and gift taxes.
US Expat Tax Question #2 – Will I owe tax?
Most US Expats do not pay US Tax, but some do.
If you pay income tax to a foreign country, you might be able to claim the foreign tax credit to offset your US Tax liability. Also, there is the foreign earned income exclusion election. If you qualify, this typically allows you to exclude just over $100,000 US dollars from tax.
There is also self employment tax to consider. Expats who have income from a sole proprietorship or other self employment, must pay this tax to the US to cover their social security and medicare.
Self employment tax is not credited or excluded with the foreign tax credit or the foreign earned income exclusion. Those are only for “income” tax specifically. To be excluded from self employment tax, the US must have a special treaty with your country of residence and you must pay the equivalent of social taxes to that county.
US Expat Tax Question #3 – What if I was supposed too file, but I have not been filing?
You’re probably in pretty good shape as there are procedures to get caught up – but you need to file soon.
The IRS understands that US persons living abroad are not aware of their filing requirements. Because of this, they are providing amnesty and penalty abatement for expats with reasonable cause.
They even allow for the late election of the foreign earned income exclusion in most cases.
Importantly, for expats that have not filed in many years and have reasonable cause for not filing, there is the “streamlined foreign offshore procedure” which will help to avoid penalties and (partially) avoid expensive preparation costs and hassle.
There is also the overseas voluntary disclosure procedure, which is great for those that are “really” in trouble.
US Expat Tax Question #4 – Can I claim the foreign tax credit?
If you had income the was sourced outside of the US, and you paid income tax on that income to another country (most countries), then you can generally claim a US tax credit to prevent the double taxation of that income.
If you pay less in tax to a foreign country as compared to what you owe to the US on that income, then it is likely that you will still owe the difference to the United States.
Note also that the foreign tax credit provides a credit for income taxes only – it does not allow for a credit for payment the non-US equivalents of social security and medicare. This also includes self employment tax, which may be exempt via treaty. To read more about self employment taxes for US expats, click here.
The foreign tax credit rules are extremely complicated and it may make more sense for an expat to utilize tax benefits other than the foreign tax credit to minimize their US tax liability. Please be sure to read the rules carefully or hire us to help you do your taxes here.
US Expat Tax Question #5 – What is the foreign earned income exclusion?
If you pass certain presence or residence tests, you may qualify to elect the foreign earned income exclusion (FEIE).
The FEIE helps you to exclude about $100,000 US Dollars of “earned” income from tax. This amount increases slightly each year with inflation.
You may also possibly be able to exclude a portion of your housing expenses from your income.
The income generally must fall into the earned income category. Investment income, for example, does not count.
If you exclude earned income, you cannot tax credit for the amount of income that was excluded. There’s a formula to figure out by how much the credit must be reduced if the exclusion was elected.
There are rules about revoking the exclusion – sometimes making you wait five years again to claim it.
Like the foreign tax credit, the rules for the foreign earned income exclusion are ridiculously complex, so it’s best to have a professional look at it before claiming it (or not claiming it).
US Expat Tax Question #6 – How long must I stay present outside of the US to exclude taxes?
If you are just bouncing from place to place, enjoying life, that’s great – but you will need to pass the physical presence test.
If you have legitimately and until further notice moved and settled in to a non US location, then you might qualify for the bona fide residence test.
A) The physical presence test
Under the “physical presence test”, a US expat must be present outside of the US for 330 days for the year.
You can actually use ANY 12-month period for the 330-day rule and possibly claim a partial exclusion (see the next frequently asked question below).
B) The bona fide residence test
Alternatively to the physical presence test, you may qualify to meet the “bona-fide residence test”. You meet this by first residing outside of the US for an uninterrupted period of one year. Under this test, you do not have to worry about the 330-day rule – but you really must be living as a resident of a non-US location.
US Expat Tax Question #7 – What if I was overseas from the middle one one year to the middle of the next?
If you pass the 330-day test for that 12-month period, you are likely OK to claim some of the exclusion.
You can use ANY 12-month period for the 330-day test, and then allocate the exclusion by the amount in which that period fall within the calendar tax year.
Note that you cannot allocate the exclusion based on “less than 330 days”. You must meet the 330-day test in at least some sort of 12-month period that falls within the tax year.
US Expat Tax Question #8 – Can I claim my non-US spouse and children?
If you decide that you wish to file jointly, you generally must include all of your spouse’s worldwide income on the tax return and you will both be treated as US persons for tax purposes.
To claim children as dependents on your tax return, they generally must be US citizens or permanent residents. There are exceptions for children who are citizens of Canada and Mexico. Regardless, to claim them, they will need ot have a social security number or at least a US international tax ID number (ITIN).
US Expat Tax Question #9 – Can I contribute to an IRA?
Any income excluded under the foreign earned income exclusion (and/or the housing exclusion) can NOT be contributed to an IRA.
If you claim the foreign tax credit instead, however this might allow for an IRA contribution.
This is extremely general advice, but in most cases when an expat claims the foreign tax credit (and not the foreign earned income exclusion) and owes no tax, it may make sense to contribute to a ROTH IRA if other criteria is met.
US Expat Tax Question #10 – What is an FBAR?
An FBAR is a simple report that is required to be filed if any US person has more than $10,000 US dollars in non-US bank or other accounts. This is aggregate (cumulatively) for the sum of all such accounts, including accounts for which you have any kind of signature authority.
There is no tax on this form, and it does not contain complex rules as with an IRS form, but the penalties for not filing them start at $10,000 per year.