Get to know the authorIf you still have US citizenship, your worldwide income is subject to US tax rules. No matter what country you currently call home.
Still, many American expats spend years abroad without being aware of the fact, so they fail to file a tax return with the IRS. And when they learn about it, they are unsure of what to do, while their tax obligations keep piling up.
Worry not! If you’re a US citizen abroad who never filed a tax return, our guide will help you understand how to do it and avoid or mitigate potential penalties.
Before we start… Should you worry if you’re behind on your taxes?
To answer the burning question before we dive deep into how to file a tax return as a US expat, here’s a TL;DR.
As a US citizen living abroad, you can certainly catch up on your taxes without facing penalties and fines. There are IRS programs like the Streamlined Filing Compliance Procedures or voluntary disclosure programs, which require filing delinquent tax returns and FBARs while certifying non-willfulness.
However, it’s key to act fast and seek guidance from a tax professional specializing in expat taxation to navigate the process effectively and minimize potential penalties.
Read on to learn more about your filing obligations and the correct way to file taxes and tax returns as a US expat.
Understanding your filing obligations
As a US citizen living abroad, it’s important to understand your filing obligations to remain compliant with the IRS requirements and avoid complications. Failing to file a tax return can lead to penalties and legal repercussions, even if you’re living outside the US.
How do you determine your filing status?
Your filing status as a US expat depends on many factors, including marital status and income sources.
The IRS recognizes different filing statuses, such as Single, Married Filing Jointly, Married Filing Separately, and Head of Household.
These statuses apply to US citizens living outside the country, too. Understanding your correct filing status is crucial for determining your tax liabilities and potential deductions.
IRS criteria for filing a tax return
The IRS has specific criteria to determine if you’re required to file a tax return. These are based on factors like your income level, filing status, and age. As a US expat, you may be required to file a tax return if:
- Your income exceeds thresholds set by the IRS, which vary depending on your filing status and age
- Even if your income is below the threshold, you may still be required to file a tax return if you meet other criteria, such as self-employment income
Note:
The threshold required for filing for self-employment is net earnings of $400 and above and just $5 if Married Filing Separately.
Understanding these criteria is essential to ensure compliance with US tax laws and avoid potential penalties for non-filing.
Identifying triggers for US tax filing obligations
Several factors can trigger US tax filing obligations for expats living abroad.
Income sources
Income earned from various sources, including employment, self-employment, investments, rental properties, and foreign bank accounts, may be subject to US taxation.
Residency status
Your residency status, including whether you qualify as a bona fide resident or meet the substantial presence test, can impact your US taxes owed to the US.
Treaty tiebreaker rules
If you’re considered a tax resident of both the United States and another country due to dual residency, treaty tiebreaker rules may determine which country has the primary right to tax your income. However, even if you meet the treaty tiebreaker, if you are a US citizen, you are still required to file a tax return. This is the case even if you don’t end up owing anything on the US return.
What are the penalties for not filing your tax return as an expat?
Failing to file a US tax return can have serious consequences, including different penalties and fines. If you’re a US citizen abroad who never filed a tax return before, it’s key to understand the penalties you may be looking at and the available options for penalty relief if you want to get back on track:
If you failed to file a tax return
The IRS imposes a penalty for failing to file a tax return by the due date, including extensions. This penalty is calculated based on the amount of tax owed and is generally more severe than the penalty for failing to pay taxes on time.
If you failed to pay the taxes you owe
In addition to the failure-to-file penalty, there is also a penalty for failing to pay taxes owed by the due date. This penalty is assessed based on the amount of unpaid taxes and accrues interest over time until the balance is paid in full.
Can you mitigate the consequences of failing to file a tax return?
In certain circumstances, taxpayers may be eligible for penalty relief if they can demonstrate reasonable cause for their failure to file or pay taxes on time. Reasonable cause may include factors such as illness, natural disasters, or other events beyond the taxpayer’s control.
Some other penalty relief options include:
- First-Time Penalty Abatement: The IRS offers penalty relief through the First-Time Penalty Abatement (FTA) program for taxpayers who have a clean compliance history and have not previously incurred penalties for three years prior to the tax year in question. This program allows eligible taxpayers to request abatement of certain penalties, including the failure to file and failure to pay penalties.
- Streamlined Filing Compliance Procedures: The IRS offers the Streamlined Filing Compliance Procedures for non-resident taxpayers who have failed to meet their US tax filing obligations due to non-willful conduct. This program allows eligible taxpayers to catch up on their taxes without facing penalties or fines, provided they meet certain eligibility criteria.
- Voluntary Disclosure Practice: The VDP is another option for taxpayers with undisclosed foreign financial assets or income who wish to come forward voluntarily and become compliant with US tax laws. The program offers penalty relief and the opportunity to avoid criminal prosecution for willful non-compliance.
Tax forms for filing a tax return as a US expat
When filing taxes as a US expat, you must use certain tax forms to report your income, assets, and potential foreign financial accounts.
Some of the key forms include:
FBAR
The FBAR is an annual report submitted by US taxpayers to the Financial Crimes and Enforcement Network (FinCEN). Its submission serves the administrative purpose of registering all foreign bank accounts held (fully or jointly) by an American taxpayer with FinCEN.
Form 1040
Form 1040 is the standard individual income tax return form used by US citizens and residents, including expatriates. It is used to report worldwide income, including income earned abroad.
Form 8938 (Statement of Specified Foreign Financial Assets)
Expats with specified foreign financial assets exceeding certain thresholds must file this form to report their non-US assets. This includes bank accounts, investments, and certain foreign financial accounts.
Common tax credits and deductions
You may be eligible for various tax credits and deductions designed to reduce or eliminate your tax liability as a US citizen living abroad.
Some of the common credits and deductions available include:
- Foreign Tax Credit (FTC): This credit allows you to use taxes paid to foreign governments on foreign-sourced income against your US tax liability. It helps prevent double taxation on the same income.
- Foreign Earned Income Exclusion (FEIE): This exclusion allows you to exclude a certain amount of foreign-earned income from your taxable income, reducing your overall tax liability. To qualify, you must meet specific requirements related to your residency and physical presence abroad.
- Foreign Housing Exclusion or Deduction: If you incur housing expenses while living abroad, you may be eligible for a housing exclusion or deduction to offset these costs.
How can I claim tax credits and deductions?
While tax credits and deductions can help minimize your tax liability, it’s essential to understand the eligibility criteria and proper procedures for claiming them. Here are some key steps to ensure you’re properly claiming tax credits and deductions:
- Keep detailed records: Maintain accurate records of your income, expenses, and foreign taxes paid to substantiate your claims.
- Review IRS guidelines: Familiarize yourself with IRS guidelines and requirements for claiming specific credits and deductions to ensure compliance.
- Consult a tax professional: Especially if you’re a US citizen abroad who never filed a tax return, consider consulting with a tax professional specializing in expat taxation to navigate complex tax rules and maximize potential benefits.
How to file your tax return from abroad
With the right resources and guidance, the process of filing your tax return from abroad can be straightforward.
You essentially have two ways to comply with your tax obligations: electronically or through mail.
- Electronic filing (e-File): One of the most convenient options for US citizens living abroad; many tax preparation software programs offer e-filing services that allow you to prepare and submit your tax return online. This method is efficient and secure and can expedite the processing of your return. Depending on your filing circumstances, you may not be eligible to file electronically (i.e., those using the Streamlined Procedure must paper mail their returns).
- Mailing options: If you prefer traditional methods, you can still file your tax return by mail. You can download the necessary forms and instructions from the IRS website, complete them manually, and mail them to the appropriate IRS address for international filers. Be sure to allow for sufficient time for mailing and processing, considering potential delays in international mail delivery.
Pro tip:
Given the complexity and many moving pieces of expat tax filing, we do not recommend this method as it is easy to make a mistake “by hand.”
To make sure you’ve filed your tax return correctly, make sure you only rely on information from trusted resources. One of the key websites you’ll need is, of course, the IRS website (irs.gov), which provides access to forms, instructions, publications, and frequently asked questions related to international tax matters.
Reminder:
Don’t forget about the deadlines. As a US citizen living abroad, you are granted an automatic extension to file your tax return until June 15th. However, any taxes owed are still due by the traditional April 15th deadline. Be mindful of these deadlines to avoid late filing penalties or interest charges.
