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4.8  of 1000+ reviews by Trustpilot   ✔ Tax returns for both US and abroad
4.8  of 1000+ reviews by Trustpilot   ✔ Tax returns for both US and abroad
4.8  of 1000+ reviews by Trustpilot   ✔ Tax returns for both US and abroad
4.8  of 1000+ reviews by Trustpilot   ✔ Tax returns for both US and abroad
4.8  of 1000+ reviews by Trustpilot   ✔ Tax returns for both US and abroad
4.8  of 1000+ reviews by Trustpilot   ✔ Tax returns for both US and abroad
4.8  of 1000+ reviews by Trustpilot   ✔ Tax returns for both US and abroad
4.8  of 1000+ reviews by Trustpilot   ✔ Tax returns for both US and abroad
us expat tax

US Expat Taxes: What You Need to Know

By January 17th, 2024No Comments8 min read
Discover insights on US expat taxes, FBAR reporting, and avoiding double taxation. Get expert advice from Expats Overseas .

Every country has a tax system based on your place of residence and employment, except for the United States and Eritrea. In the United States, residents are taxed based on their citizenship, which can be surprising when you live abroad. Regardless of where you work or reside, you are required to file tax returns in the US.

So, how does the US expat tax system operate? Why do you have to pay taxes in America while living abroad, and how can you prevent double taxation? These are excellent questions. Learn how the system functions and how you can easily ensure compliance with the right assistance.

Summary US Expat Taxes:

  • As a US expatriate, you must report your global income in the US annually.
  • In addition to the standard Form 1040, you are also required to file an FBAR report.
  • If you are not compliant or unaware of these requirements, there may be voluntary disclosure programs available to return to the US tax system without penalties.

Why does the US use a citizen-based tax system?

This system dates back to the Civil War era when the US government decided that every American, regardless of their global residence, must continue filing tax returns. However, these rules were not consistently enforced or monitored at that time.

It wasn’t until 2001, when the US government sought more transparency in financial transactions to detect money laundering, and with the implementation of FATCA rules in 2014 involving several countries, that the IRS gained the ability to effectively monitor these tax obligations.

In essence, FATCA legislation enables banks and financial institutions to share banking data details of US customers with the IRS. This allows the IRS to cross-reference information with the tax returns they receive.

What income must I report in each country?

One common misconception among US expats is the idea of relinquishing US income and assets while only declaring locally earned income in their country of residence. However, this is incorrect.

In both the US and many other countries, you are required to report your worldwide income on your tax return. Consequently, you may need to file tax returns in both your country of residence and the US. This can be complex as tax regulations often vary significantly between countries.

How can I avoid double taxation?

The good news is that most countries (though not all) have tax treaties with the United States. These treaties ensure that there is no double taxation on income or assets that are subject to the same rules in both countries. While this sounds promising, there are still countries with no income tax or very low rates, necessitating the remittance of the difference to the US.

However, the Foreign Earned Income Exclusion (FEIE) provision allows Americans residing abroad to exclude up to $112,000 of income from their US tax obligations. If this is insufficient or your situation is more complex, Tax Credits may also be an option. In many cases, experienced tax preparers can help ensure that no US tax is owed for Americans residing outside the United States.

Do you earn a modest income? You might not have to file a tax return.

Great news! If you are a homemaker or have a very low income, you may not be required to file a tax return. Below are the income thresholds based on filing status:

For single citizens:

– $12,950 if under age 65

– $14,700 if age 65 or older

For married citizens filing jointly:

– $25,900 if both spouses are under age 65

– $27,300 if one spouse is under age 65 and one is age 65 or older

– $28,700 if both spouses are age 65 or older

For married citizens filing separately: $5 (Yes, that’s correct, $5.)

For self-employed citizens: $400

For citizens filing as head of household:

– $19,400 if under age 65

– $21,150 if age 65 or older

For citizens filing as a qualifying surviving spouse with a dependent child:

– $25,900 if under age 65

– $27,300 if age 65 or older

 

These thresholds change annually, and it’s essential to note that you may still be advised to file a return even if your income falls below the threshold. This could be for various reasons, such as future citizenship termination, maintaining continuity, or receiving tax refunds.

What is the deadline for filing outside the United States?

Individuals living outside the US automatically receive a standard two-month grace period, setting the deadline around June 15 (adjusted for weekends and holidays).

However, this timeframe might still be tight, especially if you need to prepare a local tax return first. In such cases, you can request an extension until October 15 using Form 4868. If that’s still insufficient, you can seek another extension until December 15 (note that this extension doesn’t apply to FBAR reporting, as the final FBAR deadline is October 15).

Keep in mind that the IRS payment deadline doesn’t have an extension, and it remains May 15.

What is FBAR?

FBAR (Foreign Bank Account Reporting) is a crucial requirement that you must not overlook. The US Treasury mandates that every American reports all foreign bank accounts (accounts held outside the US). You must disclose the highest balance in your accounts for each year (please note that European banks typically report balances as of December 31 on annual statements, but the IRS requires the highest balance during the year).

This reporting applies not only to accounts in your name but also to joint bank accounts and accounts where you have signing authority. Importantly, no tax is imposed on this information; it is solely for reporting purposes to help the US identify money laundering and tax evasion. However, the US Treasury imposes significant fines for non-compliance, and there is no excuse for failing to file.

Fines and risks you should be aware of

While not a pleasant subject, it’s essential to understand potential penalties. If you pay taxes after the May 15 deadline, you will incur an interest penalty, calculated as a percentage of the unpaid amount. You can avoid this penalty by remitting your tax payment to the IRS before May 15.

There is also a percentage-based interest and penalty for late or non-filing of the tax return itself. However, these amounts are insignificant compared to the substantial fines associated with late or non-filing of FBAR reports. These penalties can reach up to $50,000 or 50% of the account balance in question. Therefore, it is crucial to remain vigilant about your FBAR reporting.

I was unaware, how can I regain compliance?

Many expats find themselves in this situation when moving abroad, as there is a multitude of complexities to navigate. You may not have considered the need to file a US expat taxes return or received incorrect advice. The good news is that it can be resolved.

The IRS has introduced the Streamlined Procedure for such cases. Under this program, you can file returns for the previous three years and report FBARs for the past six years. Additionally, you must make an official statement affirming that you were unaware of your obligation to file a tax return. If done correctly, this procedure allows you to return to the tax system without incurring penalties.

Who can assist with my US expat taxes return?

To put it as objectively as possible, seek assistance from professionals with proper training and substantial experience in this area. Even then, it is essential to ask comprehensive questions when tax liabilities arise. 

US expat taxes regulations change annually, and while tax returns may appear straightforward, there are still numerous nuances in filing them accurately. One common pitfall is having a US accountant who lacks sufficient expertise and fails to apply the rules correctly, resulting in unjust double taxation. This is unfortunate, especially when it is entirely avoidable.

Filing tax returns twice – a complex task!

Indeed, filing tax returns in two countries annually can be daunting, but it doesn’t have to be. This is where Expats Overseas can lend a hand, serving as the sole one-stop shop offering personalized service. 

Expats Overseas can prepare both your local and US tax returns, ensuring compliance with all deadlines. It’s a fast, secure, and efficient solution, with all returns signed by a licensed CPA.

Expats Overseas: your comprehensive solution for US expat taxes filing

Navigating US expat taxes obligations as an expatriate can be challenging, but you don’t have to face it alone. Expats Overseas offers personalized service and expertise to accurately and efficiently file your US tax return(s).

Contact Expats Overseas today to ensure compliance with both US and local tax laws and avoid double taxation.

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Speak with us free of charge and of any obligation.