Tax Filing 101 for U.S. Expats Living Abroad

The United States is one of only two countries in the globe that taxes all of its citizens regardless of where they live. While this may not sound like a big deal for locals, it’s a different case altogether for expats. Since living in another nation doesn’t exempt them from U.S. tax obligations, they have more financial responsibilities to settle.

Given that the U.S. tax system can be difficult to comprehend, it’s no surprise why many expats get lost in the technicalities. In case you require assistance, the guide we’ve prepared will discuss important things expats need to know when tax filing.

10 Things U.S. Expats Should Know About Tax Filing

As an expat, one of your biggest concerns would be dealing with the taxes you owe to the U.S. Since handling multiple financial obligations can cause a great deal of stress, you’ll need to find ways to eliminate liabilities. To make things easier for you, here are ten things every expat should know when tax filing.

1. Many American expats don’t owe U.S. taxes.

American expats must file tax returns, but this doesn’t always mean that they’ll be charged immediately. There are several benefits you can take advantage of to reduce your tax expenses.

For starters, provisions such as the Foreign Earned Income Exclusion (FEIE) will ensure that your income won’t be taxed twice. On the other hand, availing of Foreign Tax Credit (FTC) can greatly benefit you by reducing the U.S. taxes you owe.

2. Foreign Earned Income Exclusion isn’t automatically applied.

Many expats use FEIE to minimize their overall tax expenses. By excluding the income taxed in your home country, you avoid being taxed twice. Once you meet the necessary qualifications, you can exclude up to $107,600 (for tax year 2020). If your earned income exceeds this amount, you may qualify for an additional exclusion under the foreign housing exclusion.

If you plan to avail of this benefit, know that it doesn’t automatically come into play. No matter how long you’ve lived outside the U.S., FEIE will only take effect upon your submission of Form 2555.

3. You must pass a residency test before availing of FEIE.

To avail of the FEIE, expats are required to pass a Physical Presence Test or bona fide residency test. The physical presence test basically requires you to live in a foreign country for at least 330 days during a consecutive twelve-month period, but keep in mind that the time you’ve spent in transit (land, air, or sea travel) not in a foreign country isn’t included. Taking note of your travel dates will ensure that you don’t miss out on an important benefit. The bona fide residence test is more complicated and you should speak with a tax professional if unsure about qualifying under this test.

4. FTC can’t be used to reduce taxes on related excluded income.

FTC is popular for helping expats minimize the taxes they owe. If you plan to use both FEIE and FTC, know that using them in tandem has limitations. For example, if you’ve already excluded a portion of your income from taxes with FEIE, you can’t use FTC to make further reductions on that excluded income. The good news is you can use FTC to cut down your remaining balance.

5. Income gained in the U.S. is not exempt from taxation.

If you have an investment in the United States, the FEIE will not reduce the income tax of that asset.

6. You could amend a return if you made an error.

Filing mistakes are expensive but are highly common amongst expats. If you were unable to report some gains or deductions, don’t worry. You can avoid penalties by amending your previous return with Form 1040-X. File the form within three years after the filing date or two years after you’ve paid your dues.

7. Foreign Bank Account Report must be filed if your aggregated account balance is over $10,000.

The Foreign Bank Account Report (FBAR) is a federal tax form designed to prevent tax evasion cases. To ensure that everyone pays dues, the U.S. government requires all expats that have holdings of more than $10,000 to file the FinCEN Form 114. For convenience, this form can be easily submitted through the Bank Security Act (BSA) E-Filing system.

8. Expats with highly valuable assets will need to file for Form 8938.

Like the FBAR, the Foreign Account Tax Compliance Act (FATCA) was built to prevent expats from hiding money in foreign accounts and assets. Should any of your assets exceed the following thresholds, you must file Form 8938.

• Single or Married Individuals Filing Separately: You acquired foreign assets worth $200,000 or more on Dec 31, or more than $300,000 during the tax year.
• Married Couple Filing Jointly: You acquired foreign assets worth $400,000 or more on Dec 31, or more than $600,000 during the tax year.

9. Renouncing citizenship will not help you avoid taxes.

To avoid the stress of tax-filing, some expats renounce their U.S. citizenship completely. If you plan to do so, be aware that it is not an easy way out. For starters, you’ll need to prove that you’ve complied with Internal Revenue Service (IRS) tax regulations for the past five years.

Apart from these hindrances, you’ll also have to deal with the consequences that come with renouncing citizenship, like passport complications that can make it harder for you to travel.

10. You can consult with an expat tax service to make tax filing simpler.

It’s no secret that the U.S. tax code can be very difficult to understand. If you’re living outside of the country, being away makes it even harder to comply with regulations. Instead of doing something that will subject you to more unwanted charges, one good way to make things easier is to acquire expat tax services.

Having an experienced professional prepare your return hits two birds with one stone. It will help you comply with all U.S. tax regulations while ensuring that you only pay the amount required.

Tax Filing Made Easy

Filing tax returns can get tedious, but at the end of the day, it’s a necessity. As a citizen of the United States, being responsible for your financial obligations is one of the best ways to foster your country’s development. However, staying in line with the U.S. tax code can be pretty challenging, especially if you live abroad.

In case you require assistance, Tax Samaritan is here to help. As a service firm specializing in expat taxes, we’ll be glad to help you settle liabilities, submit requirements, and address compliance issues. Get in touch with us today to learn more about our expat tax preparation services.