Get to know the authorAround 9 million Americans live abroad, with the number continually rising as more and more people take advantage of the opportunity to live, work, and retire abroad.
Many aren’t aware though that the U.S. requires all American citizens and green card holders to file a U.S. tax return every year wherever in the world they live, reporting their worldwide income.
When they do find this out, many people experience a sense of anxiety or disbelief. After all, most other countries only require you to file if you are resident in that country. Others assume that a tax treaty protects them from having to file both in the country where they live as well as to the IRS. Others are concerned that they have already missed one or more years U.S. filing when they find out, and so they may face fines or back taxes if they start filing now. The truth though is that the majority of expats can achieve U.S. tax compliance without owing the U.S. taxman a penny.
Compliance requirements
Expats are required to file form 1040 just like Americans living Stateside. Expats get an automatic extension until June 15th though, and they can request a further extension until October 15th, should they need to.
These extensions are available because expats paying foreign taxes can claim the Foreign Tax Credit, which gives them $1 tax credit for every dollar of foreign tax that they’ve already paid. The extensions give expats time to file their foreign taxes first so they can then prove they have done so when they file their U.S. return.
Expats who don’t file foreign taxes, such as Digital Nomads who travel between countries without establishing formal residence anywhere, can claim the Foreign Earned Income Exclusion instead, which allows them to simply exclude the first around $100,000 (the exact figure rises each year due to inflation) from U.S. taxation.
Expats may also have to report any foreign bank or investment accounts they have by filing a Foreign Bank Account Report, or FBAR. Expats with foreign assets, trusts or corporations may also have to report them as part of their U.S. tax filing.
“If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad.” – the IRS
There are other exemptions and credits available for expats too.
Expert advice
Achieving and maintaining U.S. tax compliance for expats is typically a more complex endeavour compared to filing from within the States, due to the additional reporting requirements and having to identify and claim the most beneficial exemptions given each expat’s personal circumstances to minimize their U.S. tax liability. This is why for expats other than those with the most simple financial circumstances, it’s important to seek trustworthy expert advice.
For example, few expats would figure out on their own that if they have just $400 of self employment income they are required not just to file a U.S. tax return but potentially to pay U.S. social security taxes, unless they can perhaps claim a provision from a Totalization agreement covering double social security taxation, if one exists between the U.S. and the country where they live.
When choosing an expat tax expert to help them achieve U.S. tax compliance, expats should ensure that they will be given personal, dedicated attention by a highly-qualified, expat tax-specializing American CPA to ensure that their circumstances are fully taken into consideration.
As a result, the ability to maintain a direct and personal relationship with their CPA is important, perhaps by instant messenger, Facetime, or Skype if their CPA isn’t based nearby.
Being able to establish that their advisor is trustworthy, expat-expert, and experienced, and that they will enjoy a personal relationship with them are arguably the most important factors that allow expats to enjoy the peace of mind that comes with U.S. tax compliance, no matter where in the world they may live.
Catching up
Expats who are behind with their U.S. tax (or FBAR) filing can catch up under an IRS amnesty program called the Streamline Procedure.
Under the program, expats must file their last three U.S. tax returns, their last six FBARs as appropriate, and self-certify that their previous non-compliance was non-willful. Having done so, expats won’t face any IRS penalties or back tax bills.
