The US is unique among developed nations in the way it taxes based on citizenship, rather than on residence. This means that all US citizens (and green card holders) are required to file a US tax return if their worldwide income meets the minimum thresholds, wherever in the world they live. They may also owe the IRS taxes on their foreign income.
Many of the estimated 9 million Americans living abroad though aren’t aware of their US tax obligations as expats though, and when they find out, expats often ask whether they should file their own US tax return or use a tax preparer.
US expat tax requirements
All Americans who earn over around $10,000 a year, or just $400 from self-employment income, are required to file a federal return and declare their worldwide income, wherever in the world they live.
While any tax owed to the IRS is still due by April 15th, because of potentially having extra filing obligations, US expats have an automatic filing extension until June 15th, and they can request a further extension until October 25th if necessary.
Should expats use a tax preparer for their return?
There are very few expats who will benefit from doing their own US expat tax return. For the majority of Americans living abroad, a specialist expat tax preparer will save them more money than they charge, besides a whole load of time and hassle.
“Since the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010, the IRS has made great strides in its global information-gathering capabilities.This could very well be the year your account information is sent to the audit-hungry IRS.” – Time.com Money
For example, Americans living abroad can elect to exclude the first around $100,000 of their income from US tax with the Foreign Earned Income Exclusion, if they can pass either the Bona Fide Residence Test, or the Physical Presence test. If they want to claim the FEIE though, they must file form 2555.
Depending on their circumstances, another exclusion may be more beneficial though, such as the Foreign Tax Credit if they are already paying tax in another country at a higher income tax rate than the US.
There are many such intricacies to filing US taxes as an expat that specialist US expat tax preparers will be well aware of, including FATCA and FBAR filing relating to reporting foreign bank accounts and assets.
Expats who prepare their own returns on the other hand will have to try to figure out the best strategy to minimize their US tax liability given their circumstances by themselves. This can be a complex and time consuming task, and there’s no guarantee that, given their lack of knowledge and experience, they will reach the best conclusions.
Specialist expat tax preparers on the other hand have the experience and expertise to know how best to advise them.
The Streamlined Procedure meanwhile is an IRS amnesty program for expats who are behind on their US tax filing that allows them to catch up without facing any IRS penalties.
Currently around 200,000 foreign banks and investment firms are providing the IRS with details of all their American account holders, while most foreign governments are sharing tax data, so don’t fall into the trap of believing the just because you are living abroad the IRS isn’t aware of your financial situation! Penalties for not filing (or for filing incompletely and incorrectly can be harsh.
What type of expat tax preparer should I use?
Some expats turn to the ‘big 4’ accountancy firms, which while capable are expensive and (being large corporations) often don’t provide a good customer service experience.
Others turn to CPAs or EAs whom they know in the US, however these accountants typically don’t have the specialist knowledge of expat taxes to enable them to offer the best strategies or advice for expats.
We recommend that Americans looking for help with their US expat tax return look for a specialist expat tax preparer CPA firm. CPAs are better qualified than EAs (IRS Enrolled Agents) to be able to strategize and offer the best advice given an expat’s individual circumstances.