US Citizens Living Abroad and Taxes – A Guide
Confusion abounds around the topic of US citizens living abroad and taxes. In this article we’re going to clear up a few common misunderstandings and set the record straight.
Do US citizens living abroad have to file US taxes?
Yes. All US citizens, including those living abroad, who earn more than the Standard Deduction amount ($12,000 per person in 2018), or just $400 of self-employment income a year, have to file US taxes, reporting their worldwide income. Expats get an automatic extension until June 15th to file to give them time to file foreign taxes first for those that have to, and they can request a further extension until October 15th too should they wish or need to.
What about tax treaties?
The tax treaties that the US has with around 60 other countries don’t prevent the overwhelming majority of US citizens living abroad from having to file US taxes. The main exceptions to this are (depending on each treaty) are students, teachers, Americans working in research or development. Instead, the treaties identify what types of income should be taxed first by each country.
The US does have a separate set of treaties with 30 other countries called Totalization Agreements that prevent double social security taxation. Otherwise, US citizens abroad who are self-employed or who work for a US company may have to pay both US and foreign social security taxes.
What about double taxation?
The fact that Americans living abroad have to file US taxes and many also have to file foreign taxes in their country of residence means many will face double taxation.
To alleviate this risk, Americans abroad can claim certain IRS provision when they file. The most common IRS provisions to prevent double taxation are the Foreign Earned Income Exclusion, which expats can claim on IRS Form 2555 and which allows them to exclude the first around $100,000 of their earned income from US taxation, and the Foreign Tax Credit, which allows Americans who pay foreign taxes to claim US tax credits up to the same dollar equivalent value as the foreign taxes that they’ve paid on the same income. Expats can claim the Foreign Tax Credit on Form 1116.
“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
What happens if US citizens living aboard don’t file?
The IRS is receiving American citizens living abroad’s financial data directly from foreign banks and investment firms, as well as their foreign income and tax data from foreign governments. This means that the IRS knows who should be filing, and if expats haven’t filed and claimed any provisions to reduce their US tax bill (such as the Foreign Tax Credit and Foreign Earned Income Exclusion mentioned above), the IRS considers them to owe US back taxes.
If the IRS believes that they owe over around $50,000 of US back taxes (and including late penalties), it can request that the State Department denies them a passport renewal until they pay. They may also run into difficulties if they visit the US.
At the moment, the IRS is struggling to process all the data that it is receiving from foreign banks and governments around the world, so it is focussing on the highest earners, however it is developing AI supercomputers to process the vast amounts of data it is receiving, so it’s only a matter of time before expats who aren’t filing receive an IRS letter at the address held by their foreign (or US) bank.
Thankfully, there’s an IRS program that lets American citizens living abroad who are behind with their US tax filing catch up without facing any penalties. The program is called the Streamlined Procedure, however it is only available voluntarily, so before the IRS gets in touch.
What else to US citizens living abroad have to report?
US citizens living abroad are also required to report their foreign bank accounts and investments if their combined total values exceed certain value thresholds. The rules for foreign account (FBAR) reporting in particular are complex, and penalties for not doing so correctly, fully and accurately are high, so it’s not a requirement that Americans with foreign registered bank or investment accounts should ignore.
The best strategy for US citizens abroad who have questions about their US tax or reporting obligations is to seek advice from a US expat tax specialist firm, especially as doing so often saves them more money that it costs.