The most common reasons Americans move abroad are due to a relationship, a career opportunity, or a sense of adventure. While living abroad is considered an adventure, Americans moving abroad must continue to file their taxes in the United States.
Filing overseas is more complex than filing in the United States. However, expats often have to consider additional filing requirements, foreign currency, and the intersection with a foreign tax system.
In this article, we'll take a look at the best tax tips for American expats living abroad.
Don't forget to file.
The first and most important tax tip for expats is: don't forget to file your taxes.
Distracted by many new and exciting experiences, many expats forget to file their taxes in the United States. Still, the rules are clear: All U.S. citizens must declare their worldwide income each year, and those that do not are subject to sanctions.
Some expats believe that an international tax treaty, that their income is earned abroad (and perhaps paid in foreign currency), or that they pay foreign taxes prevents them from filing taxes in the United States; however, unfortunately, none of this is the case. In addition, the IRS has access to overseas investment accounts, banking, and tax information, including balances and contact details, to know where expats are located and whether they should be filing or not.
Expats have two additional automatic months to file until June 15. However, in 2020, the filing deadline was moved to July 15 for all Americans as part of coronavirus measures in the United States.
Ex-pats were granted the option to request an additional filing extension until October 15, if necessary.
Expats must also declare their business interests globally and sometimes their financial assets abroad if they exceed the minimum value thresholds.
Reduce your US tax bill
If you are an American citizen, your worldwide income is subject to U.S. income tax regardless of where you live.
Another good tax tip for expats is that when expats file their taxes, they can apply for one or more IRS provisions that reduce their tax burden in the United States.
Expats who pay taxes in the country of residence can claim the U.S. foreign tax credit by submitting Form 1116 to the IRS when they file the federal return.
The foreign tax credit gives them U.S. tax credits equal to the foreign taxes they have paid. For many expats living in a foreign country with higher tax rates than the United States, supporting the foreign tax credit will not only reduce their U.S. tax burden to zero. Still, it will also provide them with excess tax credits, which can last up to 10 years (or back a year).
Alternatively, expatriates can apply to exclude income from abroad by completing IRS Form 2555. Excluding income earned abroad allows expats to simply exclude approximately $105,000 (the amount increases each year slightly due to inflation) of U.S. taxes. To qualify, expats must prove that they have spent 330 days outside the United States or are permanent residents of a foreign country.
Report your Foreign Income
Many expats are subject to an additional reporting requirement in the United States, known as an FBAR declaration.
An FBAR (Foreign Bank and Financial Accounts) is a foreign bank account report, and any expat who has a total of more than $10,000 in foreign financial accounts, including bank, investment, and retirement accounts, must submit one at any time during the year. FBARs are sent online to FinCEN, and FinCEN non-filing penalties are much higher, starting at $10,000 per year for unintentional error or non-application.
Don't forget about state taxes.
Another important tax tip for expats is to check if you must file state taxes when you live abroad. It depends on the rules of the state you last lived in. Many states agree that you no longer need to file if you live abroad for an extended period. Still, some, such as Virginia, California, South Carolina, and New Mexico, may require that expats continue to file their state tax if they have any ties with the state or intend to come back one day.
Seek expert tax advice for expats
With the tax return for expatriates, the devil is often in the details. Is it more advantageous to apply for the foreign tax credit or to exclude income obtained from abroad? Can foreign parents claim an eligible child tax credit? What's the most tax-efficient way to register a business or earn self-employment income? These are very common questions that expats have asked themselves, and seeking expert tax advice can make a huge difference to expatriate finances.
Eligible accounts also include business accounts that an expat might control or have signing authority, even if they are not in their names, such as a company or a joint account.
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