What U.S. expats need to know about filing U.S. taxes

As an American expatriate, you’re required to file US taxes annually – even if you live and work in another country. This can be a confusing and costly process, as you may also be required to pay taxes in your host country. 

The good news is that there are a number of tax breaks and deductions available to help offset the cost of expatriate taxes. Here’s a quick overview of what you need to know about filing U.S. taxes as an expat. 

Who Needs to File U.S. Taxes?

If you are a U.S. citizen or green card holder, you are considered a “U.S. person” for tax purposes and are required to file a U.S. tax return every year, regardless of where you live or earn income. 

You’re also required to file if you meet any of the following criteria:

• You’re a dual citizen of the U.S. and another country
• You’re a resident alien of the U.S.
• You have a substantial presence in the U.S. 

Even if you don’t earn income in the U.S., you may still need to file if you earn above a certain amount in foreign income. 

US expat taxes

If you are required to file U.S. taxes, you’ll use the same form – the 1040 – as everyone else. However, there are a few key differences for expats. 

First, you’ll need to file Form 2555 if you want to claim the Foreign Earned Income Exclusion (FEIE). This exclusion allows you to exclude up to $107,600 (for 2020) of your foreign earnings from U.S. taxes. To claim the FEIE, you must meet one of the following criteria:

• You qualify for the bona fide residence test. This means you’ve been a resident of a foreign country for at least one full tax year. 
• You qualify for the physical presence test. This means you’ve been physically present in a foreign country for at least 330 days during a 12-month period. 

In addition to the FEIE, you may also be able to claim the Foreign Housing exclusion or deduction. This can provide a deduction or exclusion from income for a portion of your housing expenses, such as rent, utilities, and insurance. 

Depending on your financial situation it can also be interesting to file Form  1116 and claim the Foreign Tax Credit.

To claim either of these exclusions or deductions, you’ll need to file the forms along with your 1040. 

U.S. Tax Deductions for Expats

In addition to the foreign-earned income exclusion, there are a number of other deductions and credits available to U.S. expats. These can help to offset the cost of expatriate taxes. 

Some of the most common deductions and credits available to expats include: 

• The foreign tax credit: This credit allows you to claim a credit for taxes paid to a foreign government on income earned abroad. 
• The child tax credit: If you have children under the age of 17, you may be able to claim a credit of up to $2,000 per child.
• The American Opportunity Tax Credit: This credit can be worth up to $2,500 for qualifying expenses related to your first four years of college. 
• The Lifetime Learning Credit: This credit can be worth up to $2,000 for qualifying expenses related to college or other post-secondary education. To claim any of these deductions or credits, you’ll need to file Form 1116 along with your 1040. 

FBAR Reporting for U.S. expats

FBAR is an acronym for Foreign Bank Account Report. Filing an FBAR is an additional U.S. reporting requirement for many U.S. citizens who live abroad.

FBAR reporting affects U.S. citizens with foreign registered financial accounts, whether they live in the States or abroad. Foreign financial accounts include any type of account with a positive balance, including all bank accounts and most types of investment and individual pension accounts.

Whether U.S. citizens with foreign registered financial accounts have to file an FBAR depends on whether the aggregate total of all of the balances of all of their qualifying accounts exceeded $10,000 in total at any time in the year. So, an American with 10 qualifying accounts that all had $1,001 in them—even if just for a few minutes— would have to file an FBAR to report all of their foreign financial accounts.

FATCA Reporting for U.S. expats

In 2010 the U.S. passed a law called FATCA (the Foreign Account Tax Compliance Act).

Before FATCA  many U.S. citizens living abroad neglected to file FBARs, either because they were unaware of the requirement, or because they assumed that the IRS had no way of knowing what was in their foreign accounts.

FATCA contains two provisions that affect U.S. expats.

Firstly, it leverages the U.S. global financial hegemony by compelling every foreign bank and investment firm to provide the U.S. Treasury with the personal and account information (including balances) of their account holders who are U.S. citizens. Those financial firms that don’t comply face a steep tax on transactions they make in U.S. financial markets.

The result of this has been that almost every financial firm globally now provides the U.S. with this information, allowing the IRS to check it against information provided on FBARs or to see whether an FBAR should have been filed but wasn’t.

FATCA also created a new filing requirement for U.S. citizens with foreign financial assets. This means that U.S. citizens living overseas who have a total value of financial assets abroad worth over $300,000 at any time during a year, or $200,000 at the end of a year, have to report them by filing IRS Form 8938 as part of their U.S. federal tax return.

Americans Overseas helps U.S. expats

Filing US expat taxes can be a complex process. 

American Overseas offers expat tax service for American expats, US persons living and working abroad, and green card holders.

International taxation is a quite complex and specialized area. Americans Overseas offers a large independent network of US tax accountants and financial planners, specialized for Americans living abroad. Avoid double taxation and choose affordable advice.

Americans Overseas refers you free of any obligation and free of costs. Whether you’re employed or have a small business, we’ll make your life easier with a good, affordable US expat taxes advisor for your specific financial situation.

Contact us for more information

Sources:

• IRS US expat taxes
• Expats Overseas