Get to know the authorUnlike other nationalities, American expats find themselves in an unfortunate situation of having to file a US tax return from abroad declaring their worldwide income every year, often as well as filing a tax return in their host country.
To avoid double taxation, the IRS has made available a number of exemptions, such as the Foreign Earned Income Exclusion and the Foreign Tax Credit, that expats can claim when they file.
Which is most beneficial to claim will depend on each expat’s particular circumstances, such as which country they live in, and their income sources and level.
Furthermore, US expats often have to report their foreign financial accounts (including both their bank and investment accounts) by filing a Foreign Bank Account Report, better known as an FBAR.
When expats file form 1040, they must elect whether to file as a single taxpayer, a married taxpayer, or as a head of household. For some expats, filing as a head of household may save them money.
Filing as Head of Household
The advantages of filing as Head of Household are that you have higher income tax bracket thresholds, and also a bigger Standard Deduction. So for example, for a single taxpayer, the 2018 brackets are:
“If you are a U.S. citizen married to a nonresident alien you may qualify to use the head of household tax rates.” – the IRS
- 10%: $0 to $9,525 of taxable income
- 12%: $9,526 to $38,700
- 22%: $38,701 to $82,500
- 24%: $82,501 to $157,500
- 32%: $157,501 to $200,000
- 35%: $200,001 to $500,000
- 37%: over $500,000
- Standard deduction: $12,000
While for a Head of Household they are:
- 10%: $0 to $13,600 of taxable income
- 12%: $13,601 to $51,800
- 22%: $51,801 to $82,500
- 24%: $82,501 to $157,500
- 32%: $157,501 to $200,000
- 35%: $200,001 to $500,000
- 37%: over $500,000
- Standard deduction: $18,000
To file as Head of Household, expats must meet certain criteria however, such as not being married, and having qualifying dependents for whom you pay at at least half the cost of keeping up their home. (Qualifying dependents may be children, or may be other relations).
When does electing to file as Head of Household make sense for expats?
Electing to file as Head of Household becomes interesting for expats because, although you have to be unmarried to do so, the IRS defines being married in this context as being married to another US tax payer.
So the millions of expats who are married to a foreigner are, as far as the IRS is concerned for the purposes of filing as Head of Household at least, considered to be unmarried.
Of those expats married to a foreigner (or ‘non-resident alien’ as the IRS refers to foreigners who live abroad), those who pay foreign income tax at a higher rate than the US rate will benefit from filing as Head of Household, as will those
…who pay foreign tax at a lower rate (or not at all) and who earn over around $100,000.
– expats who pay foreign income tax at a higher rate than the US rate can claim the Foreign Tax Credit, giving them a $1 US tax credit for every dollar of foreign tax that they’ve already paid; however, because they can claim more tax credits than the US taxes that they owe, they can carry forward their unused credits for future use. Filing as Head of Household will then give them a lower theoretical US tax liability, and so more spare US tax credits to carry forward.
– expats who pay foreign taxes at a lower rate (or no foreign taxes) and who earn over around $100,000 can claim the Foreign Earned Income Exclusion to exclude the first around $100,000 of their earned income from US tax liability, but will be liable to US income tax on their earnings above this amount. Filing as head of household will therefore reduce their final US tax liability.
Catching up
Expats who are behind with their US tax filing because they weren’t aware that they have to file can catch up without facing any penalties or back taxes bills using an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS writes to them.
