7 Things You Need to Know About US Expat Taxes
Here we look at the top 7 things that expats need to know about US taxes for Americans living abroad.
1 – Expats have to file
The U.S. has an unusual tax system, as it taxes based on citizenship, rather than on residence like most other countries. This means that all U.S. citizens (and green card holders) are required to file a U.S. tax return every year, reporting their worldwide income, wherever in the world they live.
2 – Expats who pay foreign taxes can claim the Foreign Tax Credit
Expats who pay foreign taxes can claim the Foreign Tax Credit when they file their U.S. tax return. The Foreign Tax Credit allows expats to claim a $1 U.S. tax credit for every dollar of foreign tax that they’ve paid on their foreign sourced income. This lets expats who pay more foreign tax than the U.S. tax they owe eliminate their U.S. tax liability completely, and they may even have excess U.S. tax credits left over that they can carry forward for future use. Expats can claim the Foreign Tax Credit by filing Form 1116.
3 – FATCA
In 2010, a new law was introduced called the Foreign Account Tax Compliance Act (FATCA) which requires foreign banks and investment firms to report their American account holders directly to the IRS or face a tax when they trade in U.S. markets. The FATCA filing requirement came into affect in 2015, and nearly all foreign financial firms are now complying to avoid the tax, providing expats’ balance and contact information to the IRS. This means that the IRS can check this information is being reported on tax returns and FBARs. Furthermore, the U.S. government has tax information sharing agreements with many foreign governments, so they have access to foreign tax records too.
4 – Expats get a filing extension
To give expats time to file their foreign taxes before filing their US taxes, the IRS provides an automatic two month filing extension for expats, so the filing deadline for expats is June 15th. Expats who still require more time to file their foreign taxes can request an additional U.S. filing extension until October 15th.
5 – Expats who meet the criteria can claim the Foreign Earned Income Exclusion
Expats who don’t pay foreign taxes, or who pay foreign taxes at a lower rate than the U.S. rate, may be better off claiming the Foreign Earned Income Exclusion.
The Foreign Earned Income Exclusion allows expats to exclude the first around $100,000 of their earned income from U.S. taxation. (The exact limit is adjusted each year due to inflation).
To claim the Foreign Earned Income Exclusion, expats must prove that they live abroad either by proving that they are a permanent resident in another country, or by proving that they spent at least 330 days outside the U.S. in a 365 day period that coincides with the tax year.
Expats can claim the Foreign Earned Income Exclusion on Form 2555.
6 – Expats may have to file an FBAR
Another filing requirement for expats is reporting their foreign bank and investment accounts. In general, if an American has over $10,000 in total in foreign bank and investment accounts, they are required to report them by filing a Foreign Bank Account Report, or FBAR. Qualifying accounts include any account outside the U.S. that an expat has control or signatory authority over, including business or other accounts that may not be in the expat’s name. Penalties for not filing an FBAR start at $10,000 for non-willful behaviour.
7 – Expats who are behind can catch up without paying penalties
Expats who have been living abroad for a while but who weren’t aware of their U.S. filing responsibilities can catch up without facing any penalties (and while claiming the IRS exemptions that prevent most expats from paying any U.S. taxes) under an amnesty program called the Streamlined Procedure. Don’t delay though, as the program is only available voluntarily, not if the IRS contacts you first.
Bright!Tax is an award-winning, leading provider of expat tax services for the 9 million Americans who live abroad.