What You Should Know about U.S. Taxes While Living Abroad
By David McKeegan,
Greenback Expat Tax Services
Tax Services is a U.S. expat income tax preparation service
All information was correct at the time this article was written (February 2013).
taxes can be complicated to begin with, but understanding U.S. tax laws
for Americans living abroad can be even more difficult. You probably
have a lot of questions, and while the IRS website is a treasure trove
of information, it can be tough to navigate.Here are some of your top
As a U.S. Expat, do I need to file Federal and State tax returns each year?
you live and work abroad, you will most likely need to file a Federal
tax return. There are a few exceptions based on your gross income,
filing status, and age but in the majority of cases, expats must file
each year. Even if you have paid foreign tax on your income, it cannot
be excluded from U.S. Taxation or at least from filing a return. As an
example, if you are married and filing jointly with your spouse, you
will need to file at least a federal return if your combined gross
income exceeds $19,500 for 2012 tax year even if you filed and paid tax
on that income in your country of residence. Many countries have double
taxation agreements with the U.S. Government so that you can avoid being
individual state has its own regulations regarding the filing of State
tax returns. For example, if you lived in Florida, Nevada, Texas, or
Washington during the past year, you will not need to file a return
since there is no income tax in these States. However, if you maintain
voter registration, property or bank accounts in certain States, such as
California, New Mexico, South Carolina or Virginia, you may still be
required to file a return every year even if you left that State many
you have retired in a foreign country, you are still taxed on your
worldwide income, which includes payments from employer-sponsored
pensions. Again, depending on the state in which you last resided, you
may also need to file a State return, particularly if you receive rent
payments or something similar.
complicated? It is. If you are unsure, we suggest you consult a
specialized expat tax provider who can confirm your filing obligations.
What forms will I need to file?
of whether you are working or retired, if you meet the requirements to
file a tax return, you will need to complete Form 1040, just as if you
were living in the U.S. In addition, you will probably want to complete Form 2555 (Foreign Earned Income) and Form 1116
(Foreign Tax Credit). The Schedules you will need to file depend on
your personal circumstances, but the most common ones are Schedule A for
Itemized Deductions, Schedule B for Interest and Dividend Income,
Schedule C for Income and Expenses from Self-Employment, Schedule D for
Capital Gains or Losses, and Schedule E if you own any rental
if you are associated with foreign financial accounts with aggregate
balances that exceeded $10,000 at any time during the tax year (January
1-December 31), you must report the accounts to the Department of
Treasury using Form TD F 90-22.1. Even if you receive an extension on
your tax return, you will need to file this form before June 30th or
risk a significant penalty. If you have significant financial holdings
overseas, you may also be required to file Form 8938 (The Statement of
Foreign Financial Assets). This requirement is part of the Foreign
Account Tax Compliance Act or “FACTA,” and for US expats the filing
threshold starts at $200,000.
When is my tax return due?
an American citizen living outside the U.S., you automatically qualify
for a two-month extension, meaning your tax return is due on June 15.
U.S. expat tax rules specify that you can use Form 4868 to request an
additional six months, extending your due date to October 15. It is
important to understand that even with both extensions, any taxes you
owe that are paid after April 15th will be subject to interest charges,
and any amount that isn't paid by June 15 will also be subject to
failure-to-pay penalties (if you have not been granted an extension).
Which currency do I use for filing purposes?
does not matter which country you reside in; your American expat tax
return must be filled out using U.S. dollars. When converting your
regular income or expenses from foreign currency into U.S. dollars, you
should use the yearly average exchange rate. The IRS recommends using
the Oanda Currency Converter
for currency conversions. If you received or paid out certain amounts
on specific days, you can look up the exact exchange rates for those
days and use whichever amount has you paying less tax. The IRS also
publishes an exchange rate chart for the last several years in multiple
currencies that you can use.
Can I exclude any of the income I earned abroad?
of the U.S. tax rights for Americans living abroad is the Foreign
Earned Income exclusion; if you receive income from a foreign country
and pass either the "bona fide residence" test or the "physical
presence" test, you qualify for this exclusion. The bona fide residence
test will be determined by the IRS according to your answers to Form
2555, but essentially, you must have been living and working in a
foreign country or physically outside of the United States for 330 days
during a 365-day period. If
you meet the above criteria, you can exclude up to a certain amount of
earned income from U.S. taxation; if your spouse also meets the above
criteria, he or she can also exclude the same amount from taxation.
Additionally, even if your spouse is a non-U.S. Citizen, he or she can
choose to be treated as a U.S. Resident for the purposes of the Foreign
Earned Income Exclusion if he or she is otherwise qualified. This
exclusion is not automatic; in order to receive the exclusion, you must file Form 2555 along with the standard 1040 when filing your US tax return.
Does where I live affect the rate at which I am taxed?
you reside in certain foreign countries, you may be able to claim a
reduced tax rate or exempt certain types of income, based on tax
treaties with the United States. If you receive any income that isn't
covered under the treaty or if the country you live in does not have a
tax treaty with the U.S., you are subject to standard U.S. tax rates.
individual states do not honor the provisions of international tax
treaties. Be sure to consult with a tax professional to find out whether
the country in which you reside has a treaty with the United States, as
well as with State government websites to determine if the state in which you last resided honors the treaty.
How is U.S. Social Security affected?
you are paid by an American employer, then your wages are most likely
subject to U.S. Social Security and Medicare taxes. However, if you are
an agricultural worker, an enrolled student, or a clergy-member, you are
exempt from these taxes, even if your employer is based in the United
States. If you are employed in certain foreign countries and you are
paying Social Security tax to that foreign country, you may be able to
avoid paying U.S. Social Security. The United States has enacted
Totalization Agreements with some countries, which ensure that you will
only pay Social Security taxes to one country (usually the country in
which you live and work), enabling you to opt out of paying the same tax
to two different countries. If you are working in a country that has a
Totalization Agreement with the U.S., you will need to obtain an
official statement from that country confirming that you are paying
foreign Social Security in order to be exempt from double taxation. The
list of countries participating in such agreements can be found on the IRS website. You can also consult the Social Security website for more information on the details of the agreements.
you are self-employed, the requirement that you pay self-employment tax
(a Social Security and Medicare tax on net earnings greater than $400)
applies whether you live in the United States or in a foreign country.
This may be eliminated by a tax treaty, but again it is best to speak
with an expat tax expert as each treaty is different and the Social
Security and Medicare payments come out before the Foreign Earned Income
Exclusion, so you could face a cash expense.
you are a U.S. citizen who has retired abroad and you are otherwise
eligible, you are still able to collect U.S. Social Security retirement
payments. However, it is important to know that the Social Security
Administration will not send payments to retirees living in Cuba, North
Korea, Cambodia, Vietnam, or some countries that were once part of the
Soviet Union. If you have worked in both the United States and a
foreign country and paid Social Security to both countries, you should
be able to receive two payments, provided you meet all the requirements
and you file a claim for benefits with both countries. At this time,
retirees living in foreign countries are not covered by Medicare. If
you will not be able to return to the United States when medical
treatment is required, you should look into purchasing additional health
What annual changes should I be aware of?
to inflation, the maximum Foreign Earned Income exclusion goes up
periodically. For example, it was $91,500 per person in 2010, $92,900
per person for tax year 2011, $95,100 for 2012 and will be $97,600 for
2013. Additionally, the housing expenses deduction changes whenever the
Foreign Earned Income exclusion changes. There may also be additions to
the countries participating in Totalization Agreements with the United
States, as well as those countries having Tax Treaties with the U.S.
About Greenback Expat Tax Services
Greenback Expat Tax Services specializes in U.S. Tax Return preparation for
Americans living abroad. Why Greenback? Our team is made up only of
CPAs and EAs who specialize in U.S. expat taxes, which means we have the
knowledge to make sure your tax return is filed correctly. Plus, we
treat our customers the way that we would like to be treated - we offer
fair pricing with no surprise extra fees, don't overwhelm you with forms
to fill out/calculations to do, and provide clear guidance on
complicated expat tax matters. To find out more about Greenback Expat
Tax Services or for additional information about expat tax topics, please visit us at www.greenbacktaxservices.com.