If you’re like many American expats, filing your US tax return from abroad may seem like a daunting task, however it doesn’t have to be that way.
When filing from abroad, being prepared and understanding which documents to gather is important to ensure a smooth, stress-free filing process.
Once you reach out to an expat tax expert, you will likely be sent a questionnaire to kick off your tax project and provide a more detailed picture of your tax situation. You will have to provide information on types of income you received, as well as about non-US financial accounts. It’s important to answer these questions to the best of your ability to save time and meet filing deadlines.
Know the rules
All American citizens including green card holders must report their worldwide income and file a US tax return if they exceed the following thresholds: they earned total worldwide income over $12,550 USD (in 2021), $400 of self employed income, or only $5 of income if they are married to a foreigner but file separately.
Another important stipulation is that when filing your US tax return all income must be converted into US dollars. It is important to use a reputable currency conversion source and to
be consistent with the source you use.
Last Year’s Tax Return
One of the first documents you will need to provide is your last tax return (US and foreign).
This gives your tax preparer a good starting point and a chance to look for any changes as well as any income or deductions you may have missed. It’s important to note that you can claim unused tax credits from previous years. The information on last year’s return is also needed to file electronically once this year is complete. If you do not have a copy of last years return, you can complete Form 4506 to request a copy from the IRS
Keeping records of the days you were in the US is essential to filing your US tax return as an expat. This is because to qualify for certain credits like the Foreign Earned Income Exclusion and the Foreign Housing Credit you must pass one of two tests to prove eligibility. The first is the Physical Presence Test: You were outside the US for 330 full days in a consecutive 12 month period within the tax year. The second test is the Bona Fide Residence Test: You were a registered resident of a foreign country and were subject to local taxes for a full calendar year.
So be sure to provide clear, accurate information on your US travel dates.
Statement of Wages and salary
Expats that work for US firms will receive their wages reported on Form W2. Freelance or independent contractor expats that work with US firms use Form 1099-MISC to report income. Expats who work for foreign firms will require a foreign wage statement or other proof of income. If you live in a country that does not have income taxes, you will need to provide other evidence of your earnings or deductions from the calendar year.
Proof of interest and dividends
This information is usually provided by your bank or financial institution and will be found on Form 1099-DIV or Form 1099-INT or the corresponding foreign document, depending on your host country. You’ll need statements for each of your interest related accounts.
Proof of Social Security/Pension Income
“Once you reach out to an expat tax expert, you will likely be sent a questionnaire to kick off your tax project and provide a more detailed picture of your tax situation.”
You will need a 1099-SSA document or foreign equivalent to show your social security and pension income. You should give this to your tax preparer right away so they can check and see if your host country has an International Social Security Agreement which can affect your taxes. This is crucial if you are self-employed.
Proof of any other Income
There are various sources of other types of income that require reporting. Examples for this would include self-employment income or social security income. If you own rental properties and generate income, that will also need to be reported. Other income like royalties, alimony, or farming income and any miscellaneous income reported on Form 1099-MISC must be submitted.
Capital Gain Documents
If you sell or purchase real estate, you will need the purchase/sale statements, as well as any proof of improvements made to a home sale between purchase and sale. Another thing that falls under capital gain documentation that will be pertinent to your tax preparer is the purchase and sales of stocks and securities statements.
Foreign Accounts Reporting Documentation
If you have any foreign accounts they may need to be reported. Reporting requirements are as follows. FBAR (expats who have more than $10,000 combined from all foreign accounts on any day in acalendar year). The FBAR is a reporting tool and not part of your tax return. This is filed on Form FinCen 114 your tax professional can file for you or advise you how to file on your own.
FATCA Form 8938 must be filed by US citizens or residents who reach certain thresholds of foreign accounts. For those who are filing as Single or Married Filing Separately and live outside the US, the thresholds are $200,000 on the last day of the tax year or $300,000 at any point during the year. These thresholds change depending on your filing status and where you are located. Having all your banking statements available and being aware of account totals on any given day of the year, is essential to ensure you are abiding by the reporting requirements to avoid steep penalties.
Ownership In Foreign Corporations
If you own a business or are a stakeholder in a foreign corporation you will need your statements of income and expenditures, including dividend distributions. Additionally, in most cases, you will need to keep a good set of Financial Statements. These will include an Income Statement and Balance Sheet that follows GAAP (Generally Accepted Accounting Principles) rules. Hiring an experienced bookkeeper is prudent in most cases when owning a corporation outside of the United States.
Taxes already Paid, Credits and Deductions
Providing documentation for any interest and taxes paid will allow you to take advantage of tax credits and exclusions you can deduct from your US taxes. Any interest you paid towards a mortgage or outstanding student loan is deductible, for example. Foreign income taxes and housing expenses are also deductible. Other deductibles may include charitable donations, gifts to relatives, medical bills not covered by insurance and paid child support and alimony. Be sure to have all supporting documents ready.
Foreign Housing Expenses
If you are claiming the Foreign Housing Exclusion, you’ll need to provide all your documentation showing your rent, utilities, costs related to repairs, personal property insurance (such as homeowner’s or renter’s insurance), leasing fees, furniture rental, and parking rentals.
Deadlines and Extensions
Expats are allowed a two month automatic filing extension, moving the filing date from April 15th to June 15th. Regardless of this extension, if US taxes are owed, the payment is still due by the April 15th deadline. If like many Americans you need more time, or you are waiting on a document to arrive, there is a further extension deadline for US expats on October 15th. This is filed on Form 4868. Your tax preparer can file the extension on your behalf.
Consult an Expat Tax Specialist
US expats filing taxes from abroad should consider seeking professional advice. Experts can advise you on how to file in your best interest based on your particular circumstances. Showing you how to claim tax credits (including unclaimed tax credits from previous years) and file extensions to avoid double taxation and penalties. In many cases you can minimize your tax liability and even receive a refund from the IRS. Most importantly make sure you have all your documentation. If it has already been reported to the IRS and not included in your tax filing this can be used as cause for an audit of your US tax return.