All American citizens and Green Card holders are required to file a US federal tax return every year, reporting their global income, even if they live abroad. Americans may also have to report any foreign registered businesses, financial assets, and bank or investment accounts that they may have. Neither international tax treaties nor filing foreign taxes prevent Americans living abroad from having to file a US tax return.
When expats file their US taxes, they can normally claim one or more exclusions (such as the Foreign Earned Income Exclusion) or credits (such as the Foreign Tax Credit, or the Child Tax Credit) that reduce – often to zero – their US tax bill. They must file to claim these though, as they aren’t applied automatically.
The first step for expats sitting down to file their US federal tax return is to gather the documents they need. Here’s a checklist of exactly which documents they need.
The first document every expat needs is their last year’s tax return, or, if they didn’t file last year, their US social security number or ITIN. Secondly, they need current year proof of income.
– Statement of wages or salary. This may be Form W-2 for expats who work for a US firm, or Form 1099-MISC for expats working as a freelancer or independent contractor for a US firm, or a foreign wage statement for expats who work for a foreign firm. Expats who work for a foreign firm and are paid in a foreign currency will have to convert it into US dollars in line with IRS guidelines before reporting it on Form 1040.
– Proof of interest and dividends. This will be Form 1099-DIV or Form 1099-INT if from US investments or banks, or the equivalent if from foreign investments of banks, which again will need converting to US dollars.
– Proof of social security or pension income.
– Proof of any other income, such as self-employment income, rental income, gambling winnings, farming income, royalties, alimony, etc, which can be in the form of bank statements if necessary. In the case of rental and self-employment income, expats will also need records of their related, relevant expenses.
Foreign account reporting documents
“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. Your worldwide income is subject to U.S. income tax, regardless of where you reside.” – the IRS
Expats who have a total of over $10,000 in foreign accounts (including bank and investment accounts), whether over $10,000 in just one account or between the combined balances of several, at any time during the year are required to report all of their foreign accounts by filing an FBAR (Foreign Bank Account Report) online to FinCEN.
Information required for FBAR filing includes:
– The names and addresses of the foreign banks and other financial institutions where you have accounts
– Your account numbers, and the highest balance in each account during the year
Capital gains documents
– Expats will also require statements showing purchases and sales of stocks and securities
– Similarly, expats will need records of real estate purchases or sales made during the year, showing the date of the purchase or sale, and the value of the transaction.
– In the case of a property sale, expats also need proof of any improvements they made to the property between purchase and sale, showing the cost of these works
Expats who own a foreign registered business will need records of their business income and expenditure, as well as any income (including dividends) received from the business.
Expats may also need the following documents, depending on their circumstances:
– Travel records demonstrating how many days they spent in the US during the year. This may be needed to claim the Foreign Earned Income Exclusion.
– Proof of charitable donations may be required if for expats who are going to take them as a deduction, showing the date they were made, the value, and the charity they were made to. Note that charitable deductions must be made to IRS 501c3 organizations, which generally are US based
– Proof of childcare costs, for expats claiming the Child and Dependent Care Credit.
– Proof of utilities and rental expenses, for expats claiming the Foreign Housing Exclusion.
Filing US taxes from abroad is typically more complex than filing from the US, and expats should always seek assistance from an expat tax expert CPA to ensure that they file completely and in their best interests.