Americans who find another country to call home may have an abrupt wake-up call during tax season. Staying compliant with U.S. expat taxes can be complicated by a lack of understanding of the United States tax code.
U.S. citizens living abroad are still required to pay U.S. taxes, and may have additional, niche forms to complete—with stiff penalties for failure to file. Gordon Law has focused on international tax compliance since 2012, helping taxpayers like you save millions on taxes and penalties.
If you’re a U.S. expatriate, here’s everything you should know about your tax requirements!
Do I Have To Pay U.S. Taxes If I Live Abroad?
Yes, U.S. expats are subject to paying taxes in the United States if they meet specific criteria. If you are a United States citizen living abroad and earn over the minimum income amount (domestic and foreign income combined), you must file a U.S. tax return.
Your taxable income can consist of the following:
- Salary
- Wages
- Alimony
- Capital gains
- Dividends
- Interest
- Royalties
- Rental Income
When filing U.S. taxes, expatriates should be aware of the following:
- The deadline for expat tax filing is typically June 15.
- Expats may be eligible to use the Foreign Earned Income Exclusion to exclude a certain amount of their foreign-earned income from U.S. taxation.
- Expats may also be eligible to use the Foreign Tax Credit, which allows them to offset their U.S. tax liability by the amount of foreign taxes they have paid.
- Expats should be aware of the FBAR filing requirement if they have foreign bank accounts with a total balance of $10,000 or more at any point during the year.
For a better understanding of what works best for your unique tax situation, the tax preparation team at Gordon Law can help ensure that you comply with all relevant tax laws and take advantage of any available tax benefits!
Are U.S. Expats required to pay state taxes?
Whether or not U.S. expats are required to pay state taxes will depend on the state where they lived and earned income before moving abroad.
Some states have income taxes and may require expats to file a state tax return and pay state taxes, even if they live and earn income outside the United States. Other states do not have income taxes and will not require expats to pay state taxes.
Tax Benefits For U.S. Expats
U.S. citizens and resident aliens who live and work abroad may be able to claim certain tax benefits to lower their tax liability.
Some of the potential tax benefits that United States expats may be eligible for include:
- Foreign Earned Income Exclusion
- Foreign Housing Exclusion or Deduction
- Foreign Tax Credit
These can help reduce your U.S. taxable income and potentially lower your overall tax bill. Learn more about each one below.
Our experienced international tax attorneys can help you identify which foreign tax credits you qualify for to help you save money on your next U.S. tax return.
Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion (FEIE) allows American expatriates to exclude a portion of their foreign-earned income from their U.S. taxable income, depending on filing status and the amount of foreign-earned income.
The IRS defines foreign-earned income as income you receive for your services while living abroad; it does not include other forms of income, such as dividends, rental income, or capital gains. To claim the Foreign Earned Income Exclusion, you are required to file IRS Form 2555 with your tax return.
Foreign Housing Exclusion or Deduction
The Foreign Housing Exclusion or Deduction allows U.S. citizens and resident aliens to exclude or deduct certain housing costs from their U.S. tax bill.
The exclusion or deduction amount is a percentage of your foreign-earned income and is generally limited to the amount of your housing costs that exceed the IRS’s base amount.
If you decided to claim the Foreign Housing Deduction instead, you would be allowed to deduct your housing costs from your taxable income. For some American expatriates, this deduction could erase most tax obligations.
Foreign Tax Credit
The Foreign Tax Credit allows U.S. citizens and resident aliens who have paid foreign taxes on their foreign income to use that payment as a credit toward their U.S. taxes.
To claim this credit, taxpayers must have a foreign income source subject to both United States and foreign taxes. To calculate the foreign tax credit, multiply the foreign tax paid by the applicable U.S. marginal tax rate.
To claim the Foreign Tax Credit, taxpayers are required to file IRS Form 1116 in addition to their tax return and itemize their foreign sources of income. Any excess foreign taxes paid can be carried over toward future tax years.
Are U.S. Expats Required To File FBAR & FATCA?
Filing taxes as an expat can be frustrating with so many forms involved.
The Foreign Bank Accounting Report (FBAR) requires any United States citizens with financial interests in or signature authority over foreign financial accounts with a value of more than $10,000 at any time during the tax year to submit the FBAR form to FinCEN.
Additionally, U.S. expats with certain foreign financial assets are required to report those assets to the IRS by filing Form 8938, Statement of Specified Foreign Financial Assets (otherwise known as FATCA).
These 2 forms are the most common ones that expats need to file, but there are many more niche forms that may apply to your situation. Learn more about various offshore disclosure forms here.
Need help understanding which forms you’re required to file? Our experienced international tax team can make sure you don’t miss anything!
Unfiled Expat Tax Returns
Some expats may go years without realizing they still have filing requirements in the States. If you find yourself in this situation, there are options to avoid harsh tax penalties and get caught up on delinquent returns!
The Streamlined Foreign Offshore Procedures are a way for expatriates who are behind in their United States tax filing and payment obligations to catch up without facing penalties.
What Are U.S. Expat Tax Penalties?
If an expat fails to file a United States tax return or pay the taxes that they owe, they may be subject to penalties and interest charges. The IRS tax penalties that an expat may face will depend on the circumstances of their case.
Some common penalties that expats may be subject to include:
- Failure-to-pay penalty: If an expat does not pay the total amount of taxes they owe, they may be subject to a penalty of 0.5% of the unpaid taxes for each month the taxes remain unpaid. The penalty is in addition to the late payment penalty and accrues until the taxes are paid.
- Failure-to-file penalty: If an expat fails to file a tax return, they may be subject to a penalty of 5% of the unpaid taxes for each month the return isn’t filed, up to 25% of the due taxes. The fine is in addition to the late filing penalty and accrues until the return is filed.
- FBAR penalties: The FBAR, FATCA, and other offshore disclosure forms each carry their own penalties for non-filing or underreporting. FBAR penalties can be $10,000 per tax year for non-willful violations.
It is crucial for U.S. expats to understand their tax obligations and to take the proper steps to avoid these penalties.
If you’ve found yourself in hot water, our tax debt lawyers can help you analyze the best strategy to get back into good standing with the IRS.
Make Your Expat Tax Filing a Breeze!
Your expat tax filing doesn’t have to be complicated! Our tax attorneys are highly experienced with tax preparation services for U.S. citizens living around the globe, ensuring you pay no more tax than you need to. Get in touch to learn more about your filing requirements.
