The underlying principle of the US tax system is that US citizens and Green Card holders are required to file and report their total worldwide income, whether they live in the US or abroad, and wherever in the world their income is earned or sourced.
This means that many expats have to file two tax returns, to Uncle Sam as well as in the country where they live.
Unfortunately, tax treaties don’t alleviate Americans living abroad from having to file US taxes.
Instead, to prevent double taxation, when expats file they can claim one or more IRS provisions such as the Foreign Tax Credit (which allows them to claim US tax credits up to the same value as the foreign taxes that they’ve paid), or the Foreign Earned Income Exclusion (which allows expats to simply exclude up to around $100,000 of their earned income from US tax, so long as they meet IRS rules defining living abroad).
Which of these two provisions is more beneficial to claim depends on the details of each expat’s situation, however expats always have to file and claim them as otherwise the IRS considers that they still owe US tax (including on their foreign source income).
Americans living abroad may also have to report their foreign bank and investment accounts (including any accounts they have signatory authority or other control over) by filing a Foreign Bank Account Report (FBAR), and their financial assets, depending on their combined value, as well as any interests in foreign registered businesses that they may have.
The only US expats who aren’t required to file a US tax return are those who annual worldwide income is below the minimum reporting thresholds.
Minimum income threshold requirements for expats to file US taxes
The minimum income required for a single expat under the age of 65 to have to file for 2019 tax year is $12,200. For 2020 tax year, the figure rises to $12,400. The threshold can change depending on the taxpayer’s circumstances though:
- Single, under age 65 – $12,200 for 2019; $12,400 for 2020.
- Single, age 65 or older – $13,850 for 2019.
- Married filing jointly, both spouses under 65 – $24,400 for 2019; $24,800 for 2020.
- Married filing jointly, one spouse age 65 or older – $25,700 for 2019.
- Married filing jointly, both spouses 65 or older – $27,000 for 2019.
“If you are a U.S. citizen or resident alien living or traveling outside the United States, you generally are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States.”- the IRS
- Head of household under age 65 – $18,350 for 2019; $18,650 for 2020.
- Head of household age 65 or older – $20,000 for 2019.
- Qualifying widow(er) under age 65 – $24,400 for 2019; $24,800 for 2020.
- Qualifying widow(er) age 65 or older – $25,700 for 2019.
There are two significant exceptions to these minimum income requirements though
- for taxpayers who live abroad and who are married but filing separately to their spouse, the minimum filing threshold is just $5 of global income
- any American with just $400 of self-employment income is also required to file a US tax return, and also potentially to pay US social security taxes.
Aside from having self-employment income, there can be other reasons why expat with income less than these thresholds have to file, such as if they Alternative Minimum Tax, or if they owe tax on an early distribution from a retirement plan.
There may also be circumstances in which expats with less income than these thresholds don’t have to file but may benefit from filing anyway. For example, expat parents who want to claim the Child Tax Credit, or other credits including the First-Time Homebuyer Credit, the Health Coverage Tax Credit, or the American Opportunity Credit, may still benefit from filing.
In all scenarios, it’s always useful to consult an expat tax specialist firm to seek expert advice regarding the most beneficial path forward in terms of getting and staying compliant, minimizing tax bills, and maximizing credits in both the short and long term.
Expats who are behind with their US tax filing because they weren’t aware of the rules can catch up without paying fines under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them. The program also allows them to claim the IRS provisions that let them avoid double taxation.