US citizens are required to file US taxes if they’re living abroad, despite often having to file foreign income taxes as well. International tax treaties don’t prevent US citizens resident overseas from having to file US taxes, however they do stipulate how to avoid double taxation, most often by claiming tax credits when you file.
Filing from overseas involves filing more forms, both to claim tax credits to avoid double taxation and also because there are extra reporting rules for many Americans living abroad, relating to reporting their foreign registered financial accounts, assets, and business interests.
IRS filing dates for US citizens living abroad
US citizens living abroad receive an extra two months to file their IRS tax return, until June 15. This is intended to provide time to file foreign taxes first. Foreign tax filing deadlines vary from country to country, and some are in fact after June 15, so US citizens abroad can also file Form 4868 to request an extension until October 15 (the same as Americans filing in the States).
However, if you do owe any US tax, this must be paid by by April 15 to avoid having to pay interest on the tax owed, even if you haven’t filed yet. This is also true of quarterly estimated payments for US social security tax, if you’re employed overseas and do not have federal tax es withheld, or if you’re self-employed (more on this later on).
Claiming tax credits to avoid double taxation
If you pay foreign income taxes, you can claim US foreign tax credits to ensure you don’t pay tax on the same income twice. To claim these tax credits, you have to file IRS Form 1116 when you file Form 1040. This allows you to claim US tax credits worth the same as the foreign income taxes you’ve paid. For Americans living abroad who live in a country with higher income taxes, this will eradicate your US tax bill, and may give you additional tax credits to carry forward (or back), too.
“Many Americans living abroad qualify for special tax benefits, such as the foreign earned income exclusion and foreign tax credit, but they can only get them by filing a U.S. return.” – the IRS
Is the Foreign Earned Income Exclusion a better option?
US citizens living abroad who don’t pay foreign income taxes, or who pay foreign income tax at a lower rate than the US rate are often better off claiming the Foreign Earned Income Exclusion on Form 2555. This is also only true if all your income is earned (rather than from rents or investments, for example), you earn less than around $110,000, and you either spent 330 days outside the US in a 365 day period (often the tax year) or have permanent residence in another country.
The Foreign Earned Income Exclusion lets you exclude up to around $110,000 (the figure varies a little each year) from US taxation.
Do US citizens living abroad have to report their foreign registered business, accounts, or investments?
Most types of foreign registered business trigger additional US reporting requirements, rather than being automatically considered pass-through entities that can be included on Form 1040. Foreign business ownership reporting is often complex, so always seek advice from a US expat tax specialist.
You may also have to report your foreign bank and investment accounts, if you have over $10,000 in total in foreign financial accounts, counting your bank, investment and pension accounts. This involves filing FinCEN Form 114 online, which is often also referred to as a Foreign Bank Account, or FBAR.
A refund for expat parents
US citizens abroad who claim the Foreign Tax Credit on Form 1116 and who have children with US social security numbers can also claim the US Child Tax Credit. This provides a tax credit of $2,000 per child, or, if you have already eradicated your US tax bill by claiming the Foreign Tax credit, it provides a refundable $1,400 per child. Note that this isn’t normally possible if you claim the Foreign Earned Income Exclusion.
US self-employment taxes
US citizens abroad who are self-employed have to pay US social security taxes. The exception is if they pay foreign social security taxes and live in one of the 30 countries that the US has signed a Totalization Agreement with to prevent double social security taxation.
These countries are: Australia, Austria, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Korea, Spain, Sweden, Switzerland, the United Kingdom, Uruguay.
Otherwise, US self-employment taxes consist of 15.3% of income. Note that neither claiming the Foreign Tax Credit nor the Foreign Earned Income Exclusion removes the requirement to pay US social security taxes.
IRS amnesty program for US citizens abroad who haven’t been filing
If you’re a US citizen living abroad and you haven’t been filing your US taxes, there’s an IRS amnesty program for expats that allows you to catch up without facing penalties (and while claiming the Foreign Earned Income Exclusion or the Foreign Tax Credit). It’s called the Streamlined Procedure, and if this is you, we strongly recommend that you seek advice from an expat tax specialist at the earliest opportunity, before the IRS contacts you