American expatriate tax laws are unusual, in that they apply to all Americans citizens around the world, rather than just US residents.
US expatriate tax laws can be divided into two categories: laws relating to tax filing and financial reporting requirements for Americans living abroad, and laws relating to Americans renouncing their US citizenship.
US tax filing and financial reporting requirements for expats
American citizens living abroad, often referred to as expatriates (often shortened to expats), are subject to American tax filing requirements just like Americans living in the States.
This means that US expats have to report their worldwide income annually by filing a US federal tax return. Income earned in foreign currencies must be converted into US dollars.
The Foreign Tax Credit allows expats to claim US tax credits in lieu of foreign taxes paid abroad, while the Foreign Earned Income Exclusion lets expats exclude up to around $105,000 ($107,600 in 2020) of their earned income from US taxation.
Expats also have to report any foreign registered business interests they may have.
“The expatriation tax provisions under Internal Revenue Code apply to U.S. citizens who have renounced their citizenship.” – the IRS
Furthermore, expats may have to report their foreign registered financial accounts and assets.Specifically, expats who have over $10,000 in total in foreign financial accounts, counting all of their foreign bank and investment accounts (including some foreign pensions), must file an FBAR (Foreign Bank Account Report).
These US tax laws for expats apply to all American citizens around the world.
Expatriation (renouncing US citizenship)
Expatriate tax laws can also refer to the process of renouncing US citizenship.
To expatriate in this sense, Americans must first be a citizen of another country and be up to date with their US tax filing. If they are behind, they may be able to catch up under the Streamlined Procedure amnesty program.
As part of their final US tax return, they must file Form 8854. The expatriation process also involves paying a $2,350 administration fee, and attending an interview at the nearest US embassy or consulate.
Furthermore, some Americans may be considered a ‘covered expatriate’, and if so they will have to pay an exit tax based on the value of their global assets.
Americans may be considered covered expatriates and so be liable to pay an expatriation tax if any one of the following three conditions applies:
– Their net worth is over $2m
– Their average annual net US income tax liability for the last 5 years exceeds around $165,000 per annum (the exact figure depends on the year of expatriation.
– Failure to certify on Form 8854 that they have fulfilled all of their tax filing obligations for the past 5 years.
Because renouncing US citizenship is irrevocable, few Americans living abroad choose this path, however the numbers of those wanting to expatriate has been rising over the last few years.
Americans living abroad should always seek advice from a US expat tax specialist to ensure that they not only become and stay compliant, but also make the best choices based on their individual circumstances.