The IRS expects you to file taxes if you’re an American citizen or green card holder living or working abroad. You’re required to file IRS Form 1040 if your worldwide income is above a certain threshold. This figure is a combination of your US and foreign earnings. You can reduce your tax obligation through benefits such as the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit.
You should file your Form 1040 by April 15th every year, although there’s a two-month extension for Americans living abroad. The IRS can grant an extension of up to 6 months through Form 4868. It’s advisable to file your taxes accurately to avoid penalties. Tax authorities can use the Foreign Account Tax Compliance Act (FATCA) to determine your income. The law requires foreign financial institutions to report assets held by American clients to the US government.
1. Do US Citizens Living Overseas File US Tax Returns?
Yes. If you live abroad as an American citizen or resident alien, your worldwide income is subject to taxation. The IRS expects you to file tax returns regardless of where you live or how long you’ve been away. For tax purposes, a resident alien is either a green card holder or an individual who passes the “substantial presence” test. Publication 519 of the IRS has clear guidelines on the taxation of resident and non-resident aliens.
2. How Does Expat Taxes Work?
Although you must file tax returns if you meet the minimum threshold, you’ll also gain from generous deductions. You’ll likely pay little or no tax due to the treaty and foreign housing exclusions, the FEIE, and Foreign Tax Credit. The following documents will ease the filing process:
- Your employer-issued W-2 form. This document provides a summary of your remuneration and associated taxes
- Form 1099 or a foreign equivalent if you trade in stocks, earn interest income, or receive dividends
- Form 1098-E if you’re servicing a student loan
- Form 1098 if you’re paying off a mortgage
- Evidence of charitable donations, if any
- Receipts showing your recent moving expenses
- Documents detailing unreimbursed business and medical expenses
3. If I Pay Taxes Where I Live, Do I Still Need to Pay US Taxes?
Yes. You must file US income tax even if you’re also doing so in a foreign country. The only way to avoid this obligation is to either relinquish your green card status or renounce your American citizenship. Form I-407 notifies the US Citizenship and Immigration Services of your intention to abandon your lawful permanent residency status.
The internal revenue code has provisions for individuals who choose this option for tax purposes. It has different requirements depending on the date of expatriation. If you did so from June 4, 2004 onward, you should file Form 8854. Failure to do so could attract penalties, including a $10,000 fine where applicable.
4. If I Make Less Than the Foreign Earned Income Amount, Do I Still Need to File?
Yes. Although you’ll not pay US tax if your income is below the FEIE threshold, you still have to file returns. The exclusion doesn’t apply automatically to those who qualify. You must claim it by including Form 2555 with Form 1040. If you fail to file your returns, the IRS will conclude that you didn’t claim your FEIE. This situation may complicate matters if the tax agency pursues you for taxes owed.
5. What is the 330-day Rule?
You can only claim your FEIE benefits if you prove to the federal tax agency that you live and work abroad. The Physical Presence Test shows that you’ve been outside the US for at least 330 days of a 365-day year. This test is also known as the 330-day Rule.
The other one is the Bona Fide Resident Test. It proves that you’re a permanent resident in your foreign country of residence or employment. You can do so by producing a residency visa, evidence of utility bills for a permanent home, or paying income tax in that country.
The 330-day Rule is preferable if you work in more than one foreign country in a year.
6. Who Needs Expat Tax Services?
The tax code is already hard to understand for US-based taxpayers. It gets even more confusing if you’re living or working abroad. Never make the mistake of assuming that you’re tax-exempt simply because you’re not on US soil. Hiring a professional tax preparer that’s conversant with expatriate taxation helps reduce your tax burden. Their advantages are:
- They understand the ever-changing US tax code and can interpret it for you.
- They can identify all the benefits you’re eligible for, including credits, deductions, and exemptions.
- Expat tax preparers are conversant with the tax laws of your country of residence. They can help you take advantage of any special treaties between it and the US.
- Hiring a tax preparer means you have more time to pursue your interests.
The IRS has a directory of licensed tax preparers to ensure you file your returns accurately wherever you reside.