US Expat Taxes – Everything You Need to Know
10 Aspects of Your US Expat Taxes You Need to Understand as an American living abroad
The United States is one of the few countries that taxes citizens on their worldwide income, regardless of where that income is earned and where they live. Greenback Expat Tax Services is here to help you make sense of the complicated rules associated with US Expat Taxes.
This article focuses on the key areas of your US Expat Taxes that you need to be aware of. We run a weekly series focusing on different elements of US expat taxes on our website as well (focusing on these items and more) so be sure to check it out!
1- The Foreign Earned Income Exclusion
Qualifying US citizens who live and work abroad may be able to save a lot of money on their expatriate tax return by filling out the form for the foreign earned income exclusion. In order to qualify, a US citizen or resident alien must have earned income in a foreign county, a regular place of business outside the US, and must meet the bona fide residence or physical presence test. This exclusion is claimed on Form 2555, and attached to Form 1040. If you qualify for the foreign earned income exclusion on your US Expatriate tax return, you may also qualify for the foreign housing credit, which would allow you to deduct up to $27,450 of your foreign housing costs.
2- The Foreign Tax Credit
It is common for a US citizen living abroad to be taxed by both their host country and the United States. The Foreign Tax Credit was designed by the IRS to reduce the burden of double taxation on US expats. US citizens may elect to claim a credit for foreign income taxes paid on their US expat taxes. This credit is claimed on Form 1116 and allows you to reduce your US tax burden by what you have paid to the foreign government.
3- Understanding Foreign Exchange Impact
When filing your US Expat taxes, it is important to note that all of the amounts must be reported in US dollars. The IRS prefers that each transaction is converted to US dollars at the daily rate, but they are also willing to accept an average annual rate in cases of numerous transactions. Depending on the fluctuation of current foreign exchange rates, choosing the right method can yield significant tax savings for you and your family. For example, let’s say you received a 50,000 EUR bonus on May 20, 2010. Using the 2010 annual average rate would translate this bonus to $66,225 USD. However, using the daily rate for May 20, 2010 would translate the bonus to $61,335 USD. As you can see, in this case using the daily rate would yield you a higher tax savings on your US Expat taxes than using the annual average rate.
4- Issues with Dual Taxation
Similar to the Foreign Tax Credit, the US has arranged tax treaties with more than 50 countries in an attempt to avoid dual taxation of US citizens living abroad. Generally, the treaties work to allocate an individual’s income only to the source of earnings. You can obtain detailed information about the provisions of each of the treaties in the IRS Publication 901 and determine how these treaties affect your US Expat taxes.
5- Social Security
As an American living abroad, you are still entitled to receive Social Security benefits. The United States has developed agreements with 24 countries in an attempt to eliminate dual taxation and ensure benefit protection for recipients. The Social Security Administration has issued Publication 05-10137 which helps expatriates manage their social security benefits while living in another country. Country specific information is also available on the Social Security website. Visit www.SSA.gov, then search for your specific country.
6- Do You Have to File State taxes?
Each of the fifty states varies in how they determine the filing requirements of your US Expat taxes. Some states have no personal income tax at all, such as Florida, Texas and Washington. On the other hand, some states, such as California and Virginia, consider whether you have retained certain rights as a US citizen, such as ownership of assets, financial accounts and a driver’s license to determine your future “intent.” If they determine that you intend to return to the state you previously resided in, they may still require you to file a tax return.
7- Foreign Bank Accounts
If you are a US citizen that has one or more foreign account(s) and the cumulative balance of these accounts exceeded $10,000 at any time during the calendar year, you must file Form TDF 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) by June 30 each year. This form is filed separately from your US Expat taxes, and must be received, not just postmarked, by the Treasury on June 30th.
8- Dates for filing
Normally, US citizens are required to file their US income tax returns by April 15. However, a US citizen living abroad is entitled to an automatic extension to file their US Expat taxes until June 15. Despite the automatic extension, all US Expat taxes still need to be paid by April 18, 2011 to avoid any interest charges.
9- Voluntary disclosure
The IRS is currently offering an opportunity for people who may have failed to report their foreign financial accounts to get current on their US expat taxes. This opportunity will end on August 31, 2011. This initiative offers a reduced penalty to those who are out of compliance, and frees you from the possibility of criminal prosecution. In order to become current with their US Expat taxes, participants must file all original and amended tax returns and make all applicable payments for taxes, interest and penalties by the August 31, 2011 deadline.
10- Getting an extension
US expats can receive an automatic extension to file their US expatriate taxes by simply attaching a statement to Form 1040 when filed by June 15. An additional extension to October 15th can be requested as well via Form 4868. Expatriates who need additional time to meet the bona fide residence or physical presence test may request an extension on Form 2350. The extension is generally granted for an additional 30 days after either of the tests have been met.
The above is meant to be an overview only- please consult with a tax professional for assistance filing your US expat taxes.
Expat Taxes May be Lower But Require Extra Care
US citizens who move to a foreign country to reduce their living expenses often find that their expat taxes are lower than when they lived in the States, at least the taxes they must pay to the United States government.
That’s because the IRS allows hefty income exclusions for US citizens living overseas that can result in significant tax savings. The agency has specific rules governing income exclusions, however, and these rules are not always easy to understand. Due to their length and complexity, it takes hours just to read the IRS regulations for expat taxes.
What those regulations spell out is a generally favorable tax system for expats, but one that requires careful study and a thorough understanding.
The responsibility of a US citizen living abroad to file timely US tax returns never ends as long as that person retains their citizenship. The amount of expat taxes due depends to a great extent on the taxpayer’s ability to qualify for what is called the foreign income exclusion. The expat taxpayer must establish foreign residence by meeting the requirements of either the bona fide residence test or the physical presence test in order to qualify for the “tax free” income exclusion, which is currently the first $91,000 of income for expats.
Determining whether an American living in a foreign country can earn up to $91,000 “tax free” often requires professional expertise. A CPA firm that specializes in expat taxes is the safest bet for a US citizen living abroad who wants to minimize his or her tax liability while complying with all US tax laws.
One in particular, Tax Planner CPA, recently expanded its professional staff to meet the growing demand for qualified tax professionals who have real life experience with expat taxes. Tax Planner CPA also provides a wealth of free information about expat taxes and related issues on its website, taxplannerscpa.com.
The firm’s blog, accessible through the website and written by CPAs and legal professionals with extensive experience in Expat Taxes, is a valuable introduction to the complex world of tax liability for Americans living abroad.
Sometimes American expats wonder, “Why should I pay any taxes to the US at all if I’m not even living there?” It’s important to remember that as long as a person holds US citizenship, he or she still enjoys all the protections that go along with that citizenship, regardless of where they choose to live. With careful and informed calculation of one’s expat taxes, living abroad as a US Expat can prove to be a pretty good bargain for the savvy.