Get to know the authorAll Americans (including green card holders) are required to file US taxes, reporting their worldwide income, including expats.
Many expats mistakenly assume that they don’t have to file US taxes if they don’t have US sourced income, or due to a tax treaty, however all Americans who earn over $12,000 or just $400 of self-employment income worldwide are required to file.
As many American expats also have to file foreign taxes in the country where they live, to prevent expats paying taxes to two countries on the same income, the IRS has put in place some exemptions that expats can claim when they file, including the Foreign Earned Income Exclusion.
The Foreign Earned Income Exclusion for Expats
The Foreign Earned Income Exclusion allows expats to exclude the first around $100,000 (the figure rises a little each year) of their earned income from US taxation.
It doesn’t matter where in the world the income is sourced (including in the US), so long as it is actively earned income (so not passive income from dividends, interest, and rents etc), and so long as the expat can prove they live abroad in one of two IRS-defined ways.
The first proof of living abroad is called the Bona Fide Residence Test, and it requires expats to provide proof of being a permanent resident in another country. The second way is called the Physical Presence Test, and it requires expats to prove that they spent at least 330 full days outside the US in either the tax year or in a 365 day period that overlaps with the tax year (for people who move abroad or back to the US mid year).
To claim the Foreign Earned Income Exclusion, expats must file either form 2555 or 2555-EZ.
“Form 2555, Foreign Earned Income, can be used to claim the foreign earned income exclusion. In some circumstances you can use Form 2555-EZ to claim the foreign earned income exclusion.” – the IRS
When should expats claim the Foreign Earned Income Exclusion?
Expats who pay foreign taxes at a higher rate than the US rate, and whose income is sourced outside the US, are often better off claiming the Foreign Tax Credit rather than the Foreign Earned Income Exclusion.
The Foreign Tax Credit can be claimed on form 1116 and lets expats claim a $1 tax credit for every dollar of foreign tax that they’ve paid on their income.
The Foreign Tax Credit can be applied to passive income that is sourced and taxed abroad too, rather than just earned income. Neither does the Foreign Tax Credit have an upper limit the way the Foreign Earned Income Exclusion does.
We recommend that expats who aren’t sure which is the best exemption to claim consult with a US expat tax specialist.
Form 2555 or 2555-EZ?
As its name implies, form 2555-EZ is a shorter, simpler version of form 2555. Whether expats can use form 2555-EZ depends on their circumstances though.
To use form 2555-EZ, expats must only have employment income (so not self-employment income), their total income must not exceed the Foreign Earned Income Exclusion (around $100,000), they must be claiming for a tax year (rather than a 365 day period that coincides with a tax year), they have no business or moving expenses, and they are not also claiming the Foreign Housing Exclusion.
The Foreign Housing Exclusion allows expats who rent their home abroad and who earn over around $100,000 to also exclude a proportion of their housing expenses. The Foreign Housing Exclusion is also claimed on form 2555.
Expats who need to file US taxes late
The IRS has an amnesty program available for expats who missed filing in previous years because they didn’t know that they had to file.
The program is called the Streamlined Procedure, and it requires expats to file their last 3 tax returns, and last 6 FBARs (a separate filing requirement for expats who have over $10,000 in foreign financial accounts, including bank and investment accounts, at any time during a year), and to self-certify that their non-compliance wasn’t willful evasion.
The program is voluntary, meaning it’s only available up until the IRS writes to them.
