If you are an American living in a foreign country, you probably have several questions when it comes to filing U.S. taxes. Do I even have to file a United States tax return? Will my income in a foreign country be taxed twice? What exclusions do I qualify for?
United States expat taxes may seem complicated, but they certainly do not have to be. In this comprehensive guide, we discuss the answers to these questions, as well as a range of tax information that will include everything you need to know about filing United States taxes as an expat.
Who must file US taxes?
If you are a United States citizen, or a resident alien/green card holder, you must file a U.S. tax return. However, your income must exceed the tax filing threshold, which varies depending on type of employment, age, and filing status. If your income does not exceed the threshold that pertains to you, you do not have to file a U.S. tax return.
The threshold for these various filing categories are:
- Filing as head of household:
- $18,000 under the age of 65
- $19,600 if 65 or older
- Filing as widow/widower with a dependent child:
- $24,000 under the age of 65
- $25,300 if 65 or older
- Married filing separately:
- $5, regardless of age
- Married filing jointly:
- $24,000 if both are under the age of 65-
- $25,300 if one spouse is over the age of 65
- $26,600 if both are over the age of 65
- $5 if under the age of 65, but do not reside in the same home at the end of the year
- Self-employed individuals:
- $400, regardless of age
Note: Keep in mind, you must convert your foreign income into U.S. dollars to properly compare your income to the filing threshold that pertains to you.
How and When Do I File My US Expat Taxes?
As a United States citizen or resident alien living overseas, you qualify for an automatic two-month extension when it comes to the final filing date of your U.S. taxes. In other words, for a normal calendar year return, your new filing due date would be June 15th instead of the nationwide standard of April 15th. U.S. expats living abroad living abroad must mail their tax returns to:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
Note: If your modified adjusted gross income (the income you receive from all business/self employment sources minus deductions from loans, expenses, exclusions, etc.) totals less than 58,000, you may be eligible to electronically file your United States expat taxes through the IRS Free file software.
Paying Self-Employment Taxes While Living Abroad
Generally, self employment taxes while living in a foreign country are paid the same as you would living in the United States. You file an IRS Form 1099, just as you would if you were living back in the United States. The current US self employment tax is 15.3%, which is comprised of a 12.4% social security tax and a 2.9% Medicare tax. The first $137,700 (as of 2020) of your income is subject to United States self-employment tax.
However, to avoid double taxation and hefty income taxes altogether, there are certain tax exclusions and deductions you can take advantage of as a U.S. expat. These exclusions/deductions include the foreign housing exclusion, foreign housing deduction, and the foreign earned income exclusion.
Other deductions/exclusions, such as foreign tax credits and tax treaties with the U.S., can significantly reduce the amount of taxes you owe. While most of the benefits do not apply to self employment tax, the amount you save by taking advantage of these exclusions can far outweigh what you pay in U.S. self employment tax.
What is Foreign Earned Income Exclusion?
Foreign Earned Income Exclusion, or FEIE, is an exclusion put in place to ensure you are not subject to double taxation on the same income by the U.S. and a foreign country. To claim the Foreign Earned Income Exclusion, use IRS Form 2555, and attach the form to your United States tax return.
To qualify for Foreign Earned Income Exclusion, you must fall under one of the following criteria:
- You are a U.S. Citizen who is a bona fide resident of a foreign country for an entire tax year
- You are a U.S. resident alien who is a citizen/national of a country in which the U.S. has a tax treaty, AND you are a bona fide resident of a foreign country for an entire tax year
- You are a U.S. citizen or resident alien that has been physically present in a foreign country for at least 330 days during a period of 12 uninterrupted months.
Note: For the year of 2020, earnings up to $107,600 can be excluded via the Foreign Earned Income Exclusion. This number raises every year due to inflation.
The Foreign Tax Credit
The foreign tax credit is a non-refundable tax break, meaning the credit can be used to negate the taxes you owe, but no amount will be paid to the taxpayer if the amount given as credit is more than the amount owed to the IRS, This tax break is used to relieve burden on taxes paid on investment income to a foreign government.
Investment income is income earned from interest, dividends, capital gains, and other profits made from an investment opportunity. To claim the foreign tax credit, fill out and attach IRS form 1116 to your tax return.
However, the taxpayer cannot claim the foreign tax credit if the tax was not imposed, the tax is not a legal foreign tax liability, or the tax is not based on the U.S. expat’s income.
Note: An expat cannot claim the foreign tax credit and Foreign Earned Income Exclusion on the same earned income.
There are many exclusions, deductions, and credits that are afforded to United States expats, each with their own requirements and qualifications. These incentives lessen the tax burden on United States citizens living abroad, and can save you a significant amount when tax season rolls around.
If you are still unsure about what incentives you qualify for, and the processes involved in filing, consulting with an accountant could be beneficial. However, it is best practice to do your research on the IRS website, and follow the guidelines provided by the IRS to ensure you are compliant.
Marc J. Strohl is a certified public accountant who specializes in taxes for U.S. expats and foreign nationals living in the U.S. He is founder of Protax Consulting Services, headquartered in New York City.
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