All Americans are required to file a US tax return and report their worldwide income wherever in the world they live. The US is nearly unique in requiring expats to file taxes. It is because the US has a citizenship-based taxation system,rather than a residence-based system like most countries.
While many American expatriates aren’t aware that they have to file a US tax return, the IRS is collecting foreign tax and bank account data from almost every country in the world, so the days of being able to duck one’s head in the sand are long gone.
Filing a US tax return from abroad is often more complex than filing from the US, as currency conversions often have to be taken into account, while there are also extra filing requirements for expats. In particular, expats with savings and investments held in foreign banks worth a combined total of over $10,000 at any time during the tax year have to file an FBAR (Foreign Bank Account Report) to report them.
Expats with over $200,000 of foreign assets (not including tangible assets such as property) must also report them using form 8398.
There is some good news though: firstly, expats have longer to file, until June 15th (and there’s a further extension until October 15th available upon request), although any US taxes due must still be paid before April 15th. Secondly, there are some exclusions available that eliminate most US expatriates US tax liability.
In particular, the Foreign Earned Income Exclusion allows expats to exclude the first around $100,000 of their income from US tax, while expats who are paying foreign taxes abroad may prefer to claim the Foreign Tax Credit, which offers a $1 US tax credit for every dollar of tax already paid abroad. In all cases though, these exclusions have to be actively claimed when you file your US expat tax return.
“You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. Taxpayers generally use the yearly average exchange rate to report foreign-earned income that was received regularly throughout the year.” – the IRS
Between converting currencies, reporting foreign accounts (and possibly assets), and claiming exclusions, it’s not surprising that many expatriates seek help filing their US tax returns. They are then faced with the choice of using a US-based accountant, a local accountant in the country where they live who does US taxes, or an online expatriate taxes specialist.
In general, the worst option is a US-based accountant, who typically has little experience of expat tax issues, and so may not be qualified to strategize in an expat’s best interests.
Some expatriates consider using a local CPA in the country where they live. The perceived advantage is being able to meet them face to face, and give them your tax and banking paperwork in person.
While local CPAs typically have experience of working with expats, the downside is the cost, which is normally higher compared to an online US expat tax specialist firm.
It’s also debatable in this day and age whether a face to face relationship is necessary: we are nearly all happy to shop and do our banking online thanks to the additional convenience.
The most important factors that should influence your decision are experience, expertise, and cost. Online expat tax specialist firms typically score better in all these areas. If they still allow you instant access to your CPA if you have a question, and the ability to securely scan and upload your tax documents from the comfort of your home, they are a hard option to beat.