Many Americans living abroad are either unaware or partially unaware of their U.S. tax obligations. The U.S. tax system is unique because taxation is based on citizenship. Almost every other country has taxes based on residence or income earned in that country, regardless of citizenship. In contrast, tax in U.S. jurisdictions is based on worldwide income, irrespective of where the citizens live.
U.S. Expatriate Tax Benefits:
The better factor is that Americans who are living abroad can keep away from double taxation and even reduce their U.S. taxes.
Immigrant taxation differs in many ways from the taxable income you earn while living in the United States. Although ex-pats have additional requirements, there are many tax benefits for Americans living abroad, including:
Immigrant taxation differs in many ways from the taxable income you earn while living in the United States. Although ex-pats have additional requirements, there are many tax benefits for Americans living abroad, including:
- In addition to income from taxation through the Expedition of Foreign Earned Income Exclusion(FEIE).
- Claiming exemption from tax on living abroad or exemption from tax on living expenses deduction.
- Applying for the Foreign Tax Credit (FTC) to offset taxes paid to other countries.
- Use of applicable treaty tax benefits to exclude other income from U.S. taxation.
Expats must know the following top 25 facts when filing US Expat taxes:
1. Do immigrants file US tax returns?
Almost all US citizens must file a US federal tax return irrespective of their location. It applies if your worldwide income exceeds the enrollment threshold. This global income may include the following:
- Wages
- Salary
- Benefit
- Earnings
- Rental income
2. Most American expats do not bear US taxes
While almost all expats are needed to file a US tax return, most US expats do not owe US tax. The United States has several significant deductions, exclusions, and credits to ensure that Americans living abroad are not taxed twice. Many expats can eliminate their US tax bills using these tax benefits.
Most expatriates can offset or erase their foreign-earned income by:
Most expatriates can offset or erase their foreign-earned income by:
- Exclude foreign income
- Foreign Tax Credit
- Exclusion from foreign housing Only pay tax on your income once! US taxpayers may claim a foreign tax credit for income already taxed by the host country.
3. You can minimize or eliminate US taxes on immigrants by excluding foreign income
For the 2022 tax year, you can exclude up to $112,000 of foreign-earned income from US taxes without foreign-earned payment! The FEIE is rated for inflation, so it increases each year slightly – for income earned in 2023, the exclusion would be $120,000. It is the most common way for US entrants to reduce or eliminate tax liabilities. Using the foreign housing exception, you can exclude some housing expenses, such as rent and utilities.
4. Exclusion of foreign income is not automatic
You must be eligible to use the foreign earnings exception, but you must also elect to do so by filing Form 2555 or 2555-EZ.
Once you elect to use the foreign earned income exception, you can include it on your tax return every year after that. However, you cannot claim the exclusion for the next five years without IRS approval if you no longer want to use it.
Once you elect to use the foreign earned income exception, you can include it on your tax return every year after that. However, you cannot claim the exclusion for the next five years without IRS approval if you no longer want to use it.
5. You must pass the residency test to use the foreign income exception
The physical presence test needs your presence in a foreign country for 330 days. Under the bona fide residency test, you must have resided abroad for at least a year without any intention of returning to the United States – so hiring outside contractors would not qualify.
6. You should carefully track your travel time to ensure you qualify as a passenger
Calculate your travel days carefully if you plan to qualify with the physical presence test. You will be physically present in the foreign country for the full 330 days, so any time you spend traveling by air (or sea) to or from the USA does not count. A simple miscalculation can cost thousands of dollars on your US expatriate tax return!
7. You can apply for an extension if you require more time to qualify
Many expats who move abroad late in the year miss significant tax benefits. If you expect to qualify shortly, you can apply for an extension or file Form 2350, which will give you more time.
8. The foreign tax credit is another method to reduce US expatriate taxes
Suppose you reside in a country with more tax or your income exceeds the foreign-earned income exception. In that case, the foreign tax credit can help you offset or eliminate your tax liability in the United States. A foreign tax credit is a dollar-for-dollar credit on taxes you pay abroad. You must file Form 1116 to elect. Many taxpayers are eligible for foreign tax credits and foreign income exclusion. If taxpayers can claim the child tax credit, selecting the foreign tax credit rather than the exclusion will often result in better tax savings.
9. Excluded income cannot be offset with a foreign tax credit
If you exclude part of your income, you cannot use the foreign tax credit on that excluded income. If you have yet to claim the total foreign income taxes paid or owed, you can carry them forward to the next ten years and back to the previous year.
10. Tax treaties help avoid double taxation of American expatriates
Income tax treaties help Americans living abroad avoid double taxation by reducing or eliminating US expatriate taxes on certain types of income. Since tax exemptions vary from country to country, expats should review the agreement with the host country and determine how they are taxed. As with any legal document, tax treaties can be complex and challenging to understand.
11. Dependent children on US tax returns can help reduce foreign taxes
The Child Tax Credit can benefit those dependent American children (citizens or permanent residents) – and sometimes even a refund! All dependent children must possess a US Social Security number to qualify for the credit.
You can also reduce childcare costs using the Child and Dependent Care Credit. However, you must have the income to use this credit. If you exclude all of your earned income, excluding foreign earned income, you can’t use the Childcare Credit.
You can also reduce childcare costs using the Child and Dependent Care Credit. However, you must have the income to use this credit. If you exclude all of your earned income, excluding foreign earned income, you can’t use the Childcare Credit.
12. Including children on US expatriate tax returns has long-term consequences
Children born abroad to non-US parents may be eligible to report as dependents on your US federal tax return. While the child tax credit(s) you receive can be financially beneficial, they are now regarded as US persons. They will have permanent US tax liability unless they choose to renounce their citizenship after adulthood.
13. Foreigners get an automatic tax payment extension till June 15
US taxpayers living outside the United States on April 18, 2022, have an extension until June 15 to file their taxes. However, any taxes in the US are due by April 18 to avoid penalties. If you return to the US, you may be eligible to use some US travel exemptions and exclusions that year, but you have until April 18 to apply since you are a US resident now.
14. Some states need to file a state tax return while you are abroad
When it comes to whether you have a government tax return as an expatriate, the critical factor is whether or not you intend to return. Each state has different rules regarding domicile and permanent residence, which affect whether you will be treated as a resident and therefore required to file.
Even if you have no idea of moving back, many US states tax residents until they “sever ties” with that state. Depending on the situation, this can be a simple process, or it can be challenging. Some states make it difficult to exclude yourself from their tax jurisdiction.
Even if you have no idea of moving back, many US states tax residents until they “sever ties” with that state. Depending on the situation, this can be a simple process, or it can be challenging. Some states make it difficult to exclude yourself from their tax jurisdiction.
15. You should file an FBAR if your external account balance exceeds the reporting limit
The Foreign Bank Account Report is a US initiative to crack down on tax fraud involving funds being stashed overseas. You must file if the total balance(s) of all your foreign bank accounts exceeds $10,000. Regarding your foreign bank accounts, pensions and investments can play a role, as well as accounts you don’t own but have signing authority over.
The FBAR is submitted electronically through the BSA electronic filing system. Even if the account(s) reaches $10,001 in just one day (or 1 minute!), you must submit an FBAR.
The FBAR is submitted electronically through the BSA electronic filing system. Even if the account(s) reaches $10,001 in just one day (or 1 minute!), you must submit an FBAR.
16. The FBAR deadline lies on tax day
The FBAR deadline is April 18, with an automatic extension to October 17. An FBAR is filed separately from a regular income tax return.
17. You may need to file Foreign Account Tax Compliance Act Form No. 8938
The Foreign Account Tax Compliance Act aims to prevent US taxpayers from hiding currencies in offshore accounts and assets. If the value of certain financial assets exceeds the filing limit (which varies by filing and residence status), Form 8938 must be filed. You may need to submit FATCA, FBAR, both, or neither!
18. You can still get Social Security benefits when you retire abroad
If you plan to retire overseas, ensure you can collect your Social Security benefits in whichever country you choose to live in. There are some countries where you usually cannot get Social Security benefits. Even if you reside in one of these countries, you can collect any late payments you owe when you move to another country.
19. Your Social Security benefits may be taxed in the United States
Your Social Security benefits must be reported as earnings on your US expatriate tax return. Some people’s benefits will be taxed, and some will not. However, the United States may not tax your Social Security payments if you live in certain countries, including:
- Israel
- Ireland
- Egypt
- Germany
- Canada
- Romania
- United Kingdom
20. Aggregate agreements specify countries for payment of social security taxes
The United States has agreements with 28 countries that specify which countries should receive your Social Security payments. Agreements usually allow credits you earn in one country to be used to calculate benefits in another country. It is an important point, without such an agreement, you will have to pay in two plans – and you will get the same benefit!
21. Income earned by immigrants in the United States is not automatically exempt from taxation
Income earned on US soil is not income earned abroad and, therefore, cannot be excluded from US taxes by excluding foreign income.
22. You must report your Rental income on your US tax return
You must report all rental income to IRS. However, many property-related expenses can offset expats’ tax liabilities. Your property repairs are immediately deductible, but improvements take a little longer. Repairs return the property to its original condition, but improvements increase its value or extend its life.
Although they differ, you need to track expenses for repairs and improvements on your rental property. The amendment may be treated as a deduction, and the amendment will be taken into account in how capital gains losses are calculated on expatriate taxes after selling your property.
Although they differ, you need to track expenses for repairs and improvements on your rental property. The amendment may be treated as a deduction, and the amendment will be taken into account in how capital gains losses are calculated on expatriate taxes after selling your property.
23. Renouncing citizenship will not help you avoid US taxes
When desperate expatriates are considering relinquishing their citizenship to avoid the burden of paying US taxes, before they do so, they must demonstrate compliance with US tax requirements for at least five years before the date of relinquishment.
24. You may amend a previous US tax return upon making a mistake
Mistakes happen. If you discover that you failed to report some income on your return or didn’t take all the allowed deductions, you must file an amended return for that year using Form 1040-X. The best option is to submit the correction before the IRS becomes aware of the error, as the penalty is often less. Once the original return is submitted, the clock starts ticking, and amended returns usually have to be submitted before a specific date to get a credit or refund.
25. You can file US expatriate tax and FBAR forms without penalty
Many expats find that after living abroad for several years, they need a US application. They may fear harsh punishment and are reluctant to fall into the trap of late returns. Fortunately, the IRS offers a waiver program to help filers comply without facing any penalties. This simplified presentation is known as the compliance process. To use this program, all you need to do is:
- Admit yourself that your failure to apply was an accident, not a deliberate refusal
- File your last three overdue tax returns and refund any tax you owe during that period (with interest)
- Submit the previous six years of Foreign Bank Account Reports (FBARs).