Filing American Taxes While Living Abroad
The two most common reasons why Americans move abroad are for a career opportunity, or for romance.
Moving abroad doesn’t mean stopping filing US taxes though, as the American tax system requires all Americans citizens and Green Card holders to report their worldwide income every year, whether they live in the States or overseas.
Historically, the IRS couldn’t effectively enforce Americans living abroad filing American taxes, however due to a law called the Foreign Account Tax Compliance Act and a raft of international tax information sharing agreements, in the age of digital banking the IRS can now access all Americans’ financial details, globally.
Furthermore, filing American taxes while living abroad is often more complicated than filing in the US.
Reporting rules for Americans living abroad
All Americans have to file Form 1040 every year, however there are additional reporting rules for Americans living abroad.
Americans who receive income in a foreign currency must convert it into US dollars before reporting it on Form 1040. There isn’t an official IRS exchange rate, so Americans can use any recognized conversion source, so long as they use the same source consistently.
As well as Form 1040, Americans often have to file extra forms to report any non-US bank and investment accounts they may have, as well as their offshore business interests. Reporting offshore foreign businesses involves different rules and forms compared to reporting American businesses, and these are often complex, so always seek advice from an expat tax specialist before attempting to file these forms.
“The Foreign Earned Income Exclusion is elective, and elections have requirements.” – Forbes
The most common additional reporting requirements Americans filing from abroad should be aware of are reporting foreign accounts, and reporting foreign assets.
American individuals who have over $10,000 in total in foreign accounts at any moment in a year have a requirement to file a Foreign Bank Account Report, or FBAR, to FinCEN. Qualifying foreign accounts include bank, pension, and investment accounts, and any business accounts that one may have signatory authority for, even if they are not registered in an individual’s name.
On top of the requirement to file an FBAR, Americans living abroad who have over $200,000 in financial assets abroad at the end of the year, or $300,000 at any time during the year, will need to report them on IRS Form 8938. (The threshold is lower for Americans living in the States, and higher for those who file ‘Married Filing Jointly’).
Tax breaks when filing American taxes from abroad
Americans living abroad who pay foreign income tax can claim the US Foreign Tax Credit by filing Form 1116 when they file their US tax return. The Foreign Tax Credit allows them to reduce their US tax liability by the same value as the foreign income tax that they’ve paid. For Americans who pay foreign tax at a higher rate, this reduces their US tax bill to zero.
Alternatively, Americans filing from abroad can claim a tax break called the Foreign Earned Income Exclusion on IRS Form 2555 that allows them to exclude their earned income from US tax liability up to a maximum income of $107,600 (in 2020 – the figure rises each year for inflation).
There are other tax breaks and credits available for expats too, depending on each individual’s circumstances.
Due dates when filing Americans taxes from abroad
The minority of Americans living abroad who owe any US tax still have to pay it by April 15th, however they don’t have to file their US tax return until June 15th, allowing them time to file their foreign taxes first.
If they still aren’t ready to file by June 15th, they can request a further extension until October 15th by filing IRS Form 4868.
FBARs are due by October 15th, too.
What if you haven’t been filing American taxes while living abroad?
Americans who have been living abroad but not filing their US taxes because they didn’t understand the requirement can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure.
Almost all Americans abroad benefit from advice before filing their US taxes, so always speak with an expat tax specialist to ensure you fulfil all your obligations and file to your maximum benefit.