From Sea to Taxing Sea: Navigating US Expat Taxes with 25 Essential Tips
For many Americans living abroad, tax season can be a daunting and overwhelming task. As a US expat, you may find yourself juggling the tax laws of both your host country and the United States. The complexity of the US tax code and the additional reporting requirements for expats can make the process of filing taxes a daunting task. However, with the right knowledge and preparation, navigating US expat taxes can be a smooth and stress-free experience.
In this article, we will explore 25 essential tips to help you understand the ins and outs of US expat taxes, so you can feel confident and in control come tax season. Whether you're a seasoned expat or just starting your journey abroad, these tips will help you stay compliant with US tax laws and maximize your tax savings.
Almost every American citizen must file a US Federal Tax Return no matter where they live or work.
Most expats are required to file additional US tax forms, such as the FBAR and FATCA.
Several tax credits and deductions are available to help expats reduce or erase their US tax bill.
1. Do Expats File US Taxes?
Yes, virtually all US citizens are required to file a US Federal Tax Return regardless of where they live in the world. This applies as long as your worldwide income exceeds the filing threshold (which varies by filing status).
That worldwide income may include the following:
If you are self-employed, the filing threshold is $400, regardless of filing status.
Even if your income does not exceed the threshold for your filing status, you may still have to file. For example, if you receive certain tax credits or refunds, you will have to file even if you wouldn’t meet the requirements.
2. Most American Expats Do Not Owe US Taxes
While virtually all expats are required to file a US tax return, most Americans do not owe US expat taxes. The US has put several necessary deductions, exclusions, and credits in place to ensure Americans living abroad aren’t taxed twice on the same income. Many expats can erase their US tax bills using these tax benefits.
Most expats can offset or erase their foreign-earned income with the following:
Foreign Earned Income Exclusion
Foreign Tax Credit
Foreign Housing Exclusion
Don’t pay tax on your income twice! US taxpayers may be eligible to claim the Foreign Tax Credit against income that their host country has already taxed.
For the exclusions, you must qualify as an official expat and have foreign-earned income, and you must file your tax return to prove that you are eligible for these benefits.
TAKE NOTE: Even if you don’t owe any taxes, you will still need to file a US tax return.
3. You Can Reduce or Eliminate US Taxes for Expats with the Foreign Earned Income Exclusion
For the 2022 tax year, you may be able to exclude up to $112,000 of foreign-earned income from US taxation with the Foreign Earned Income Exclusion! This is the most common way expats reduce or eliminate their US tax liability. The FEIE is indexed to inflation, so it increases a bit each year –for income earned in the 2023 tax year, the exclusion will be $120,000, which is 7.1% more than the 2022 tax year! This is the most common way expats reduce or eliminate their US tax liability.
You might also be able to exclude certain housing expenses, such as rent and utilities, using the Foreign Housing Exclusion.
TAKE NOTE: The Foreign Earned Income Exclusion can be applied only to earned income, not passive/unearned income. It is not possible to use both the FEIE and the Foreign Tax Credit on the same income. However, you may be able to claim each credit for different incomes if it is beneficial to do so.
4. The Foreign Earned Income Exclusion Isn’t Automatic
You must qualify to use the Foreign Earned Income Exclusion, but you must also elect it by filing Form 2555 or 2555-EZ.
Once you choose to use the Foreign Earned Income Exclusion, it remains in effect, and you will include it on your expat tax returns each year thereafter. However, should you decide that you no longer want to use it, you cannot claim the exclusion for the next five tax years without the approval of the IRS.
5. You Must Pass a Residency Test to Use the Foreign Earned Income Exclusion
To use the Foreign Earned Income Exclusion, you need to qualify for either the Physical Presence Test or the Bona Fide Residence Test.
The Physical Presence Test requires that you are physically present inside a foreign country for 330 of any 365-day period.
Under the Bona Fide Residence Test, you must have lived overseas for at least one calendar year and have no immediate intention of moving back to the US – so temporary overseas contractors and those on assignment won’t qualify.
6. You Should Track Travel Time Carefully to Ensure You Qualify as an Expat
U.S. expatriates seeking to claim the Foreign Earned Income Exclusion (FEIE) must pass either the Bona Fide Residency Test or the Physical Presence Test. Timekeeping is essential because if you fail to comply with the strict physical presence requirements of either test, you could lose your right to claim the FEIE.
If you plan to qualify via the Physical Presence Test, you must be physically present inside a foreign country for 330 full days, so any time you spent traveling in the air (or by sea) to or from the USA won’t count. Keep track of the actual dates of travel.
A small error in calculation could cost you thousands of dollars on your US expat tax return!
7. You Can File For an Extension if You Need More Time to Qualify
Many expats move abroad in the latter part of the year and worry that they won’t qualify for the Foreign Earned Income Exclusion and will miss out on substantial tax benefits. If you expect to qualify in the near future, you can apply for an extension until October 15th, or you can file Form 2350, which buys you even more time.
8. The Foreign Tax Credit is Another Way to Lower Your US Expat Taxes
If you live in a high-tax country or your income exceeds the Foreign Earned Income Exclusion, the Foreign Tax Credit may help you offset or eliminate your US tax liability.
The Foreign Tax Credit is a dollar-for-dollar credit on the taxes you pay to a foreign country. You must file Form 1116 to elect it.
Many taxpayers are eligible for both the foreign tax credit and the foreign earned income exclusion; however, if taxpayers can also claim the child tax credit, choosing the foreign tax credit over the exclusion will often yield them better tax savings.
9. Excluded Income Can’t Be Offset With the Foreign Tax Credit
Claiming the Foreign Earned Income Exclusion, the Foreign Tax Credit, or both may impact the outcome of your tax return. You should carefully consider all options before filing. For example, if you had been using the FEIE but decide to switch to the Foreign Tax Credit, you may find yourself locked out of the FEIE for five years.
If you choose to exclude some of your income with the Foreign Earned Income Exclusion, you can’t use the Foreign Tax Credit on that excluded income.
For example, you exclude $112,000 of your income and have $30,800 left over. You can only offset the expat taxes you pay on that remaining income. This prevents “double-dipping” in the eyes of the IRS!
If you find that you cannot claim the full amount of foreign income taxes you paid or accrued, you can carry these over for the next 10 years and even carry them back to the previous year.
10. Tax Treaties Help Prevent Double Taxation for US Expats
Income tax treaties help prevent double taxation for Americans living in foreign countries by reducing or eliminating US taxes for expats on certain types of income. Currently, the US has tax treaties with 69 countries. Because tax breaks vary by country, expats should review the treaty with their host country to determine how they’ll be taxed. Like any legal document, tax treaties can be complex and difficult to understand. If you’re uncertain which rules apply to you, consult an accountant.
11. Dependent Children on Your US Tax Return May Help Reduce Your Expat Taxes
The Child Tax Credit can be very beneficial for those with dependent US children (citizens or permanent residents)—and can sometimes even result in a refund! In order to qualify for the credit, all dependent children must have a US Social Security number.
In addition, you may be able to deduct child care costs using the Child and Dependent Care Credit. However, you must have earned income to use this credit. If you’ve excluded all of your earned income using the Foreign Earned Income Exclusion, you won’t be able to use the Child Care Credit.
The Child Tax Credit can be worth up to $2,000 per child in the 2022 tax year. However, income limits apply, and those who lived outside the US for more than 6 months in 2022 can only receive a maximum Child Tax Credit refund of $1,500 per child.
12. Including Children on Your US Expatriate Tax Return Has Long-Term Implications
Children born to a non-US parent overseas may qualify to be reported on your US Federal Tax Return as a dependent. While the Child Tax Credit(s) you’ll receive can be financially advantageous, remember that they are now considered US persons and will forever have a US tax obligation unless they choose to renounce their citizenship once they are an adult.
13. Expats Receive an Automatic Tax Filing Extension Until June 15th
US taxes for expats residing outside the US on April 18, 2023, receive an extension until June 15 to file their taxes. However, any taxes owed must be paid by April 18 to avoid penalties and interest.
If you move back to the US, you may still be eligible to use certain US expat deductions and exclusions that year, but you’ll need to file by April 18th because you are now a US resident.
14. Some States Require You to File a State Tax Return While Living Abroad
When it comes to whether or not you have to file a state tax return as an expat, one critical component is whether you intend to return. Every state has differing rules regarding domicile and permanent place of abode, which factor into whether you will be considered a resident and therefore have to file.
For example, Massachusetts states that one “cannot change your domicile by taking a temporary or longer than expected absence from Massachusetts. You must not intend to return.”
Even if you have no intention of returning, many US states continue to tax residents who move away until they “sever ties” with that state. Depending on the state, this can be an easy process, or it can be difficult. Some states make it hard to remove yourself from their tax jurisdiction.
For example, even if you live in another country, a state may impose taxes if:
They issued your current driver’s license or ID card
You have a spouse or child living there
Your vehicle is registered there
You’re registered to vote there
You have a bank account open there
You own property there
You maintain a mailing address there (even if you’re using a friend or relative’s address)
States that are notorious for taxing former residents include:
Consult a qualified tax professional to learn the rules for your state.
15. You Must File an FBAR if Your Foreign Account Balances Exceed the Reporting Threshold
FinCEN Form 114, also known as the Foreign Bank Account Report (FBAR), is part of the US initiative to thwart tax cheats hiding money abroad. If the aggregate balance(s) of all your foreign bank accounts exceed $10,000, you must file. When considering your foreign bank accounts, pensions and investments may come into play, as well as accounts that you don’t own but have signature authority over.
The FBAR is filed electronically through the BSA e-filing system. Even if the account(s) hit $10,001 for only one day (or one minute!), you must file an FBAR. The FBAR is filed separately from your US expat tax return.
16. The FBAR Deadline Falls on Tax Day
FBAR deadline is April 18th (the same as the federal income tax due date), with an automatic extension to October 16th. The FBAR is filed separately from the regular income tax return.
17. You May Need to File FATCA Form 8938
FATCA, Foreign Account Tax Compliance Act, is similar to FBAR in that it is intended to prevent US taxpayers from hiding money in offshore accounts and assets. Should the value of certain financial assets exceed the filing threshold (which varies by filing status and residency), Form 8938 should be filed.
FATCA and FBAR filing requirements are separate but similar. You could be required to file FATCA, FBAR, both, or neither!
PRO TIP The passing of FATCA (the Foreign Account Tax Compliance Act) has facilitated the IRS’s ability to enforce US tax filing globally. In response to this new legislation and funding, the IRS has announced plans to hire additional agents to ensure compliance with US tax laws.
18. You Can Still Receive Social Security Benefits When You Retire Abroad
If you are considering retiring abroad, rest assured that you can collect your Social Security benefitsin just about any country in which you choose to live. There are only a handful of countries where you typically cannot receive Social Security benefits, namely:
However, even if you live in one of these countries, you can still collect any back payments owed to you once you move to a different country.
For example, let’s say you moved to Cuba. While living in Cuba, you would not be able to receive US Social Security payments. But if you moved to Costa Rica a few years later, you would be eligible to collect any Social Security payments you were denied during your time in Cuba.
IMPORTANT: Make sure you understand the rules of 401(k) and IRA withdrawals overseas so you avoid hefty penalties.
19. Your Social Security Benefits May Be Taxable in the US
You must report your Social Security benefits as income on your US expatriate tax return. Some people will have their benefits taxed, while others will not. Generally, if you have other income, your benefits will be taxed. However, if you live in certain countries, your Social Security payments may not be taxed by the US. This includes:
The rules for these countries vary. Consult an expat tax specialist to learn more.
TAKE NOTE Even if your Social Security benefits are taxed, only 85% of the full amount can be considered taxable income.
20. Totalization Agreements Determine Which Country You Pay Social Security Taxes To
The US has agreements with 28 countries that outline which country should receive your Social Security payments. The agreements generally allow for the credits you earn in one country to be usable for the calculation of benefits in the other. This is an important point as, without such an agreement, you could be forced to pay into two systems—and only receive one benefit!
21. Income Earned in the US by Expats is Not Automatically Excluded From Taxation
Income earned on US soil is not foreign-earned income and, therefore, cannot be excluded from US expat taxes with the Foreign Earned Income Exclusion.
However, if you are required to pay taxes on that income to another country, you may be able to use the Foreign Tax Credit as a dollar-for-dollar credit to offset the US taxes you owe.
22. Rental Income Must be Reported on Your US Tax Return
You must report all rental income (foreign and domestic) to the IRS. However, many expenses related to the property can offset expatriate tax liability. Repairs to your property are immediately deductible, but improvements take longer. How do you know the difference? Repairs restore the property to its original state, but improvements increase the property’s value or prolong its life.
While they differ, you’ll want to keep track of expenses for both repairs and improvements to your rental property. Repairs can be taken as deductions, and improvements will factor into calculating capital gains or losses on your expat taxes after you sell your property.
23. Renouncing Citizenship May Not Help You Avoid US Taxes
While frustrated expats consider renouncing their citizenship to avoid the burden of filing US taxes, before they can do so, they must prove that they have complied with their US tax requirements for at least 5 years prior to the date of renunciation.
If you are considering this option, please note that depending on your income and net worth, you may be subject to an exit tax when you renounce. It’s the IRS’ way of ensuring you don’t renounce skipping out on a tax debt!
24. You Can Amend a Previous US Tax Return if You Made a Mistake
Mistakes happen. If you have failed to report some income on your return, or if you didn’t take all the deductions allowed, you will need to file an amended return for that tax year using form 1040-X.
Filing an amendment before the IRS catches the mistake is the best option, as penalties are often less. Once the original return has been filed, the clock starts ticking, and amended returns will generally need to be filed before a specific date to seek a credit or refund.
25. You Can Get Caught Up With Your US Expat Taxes and FBAR Forms Without Penalties
Many expats discover that years after they have moved abroad, they had a US filing requirement all along. They may fear harsh penalties and be hesitant to get caught up on delinquent returns.
Fortunately, the IRS provides an amnesty program to help expats come into compliance without facing any penalties. It’s known as the Streamlined Filing Compliance Procedures.
To use this program, all you have to do is:
Self-certify that your failure to file was an accident, not a willful refusal
File the last three delinquent income tax returns and pay any delinquent taxes you owed during that time (with interest)
File Foreign Bank Account Reports (FBARs) for the last six years
In most cases, this will bring you into compliance with IRS regulations. It’s the perfect program for expats who were unaware of their US tax filing obligations.
Next Steps for Your US Taxes for Expats
Now that you’re up to speed on the top 25 things about expat taxes consider the next steps based on your tax situation.
1. File a US Expat Tax Return Every Year
First, make a plan to file your US Federal Tax Return every year. Skipping filing is never a good idea. It puts you at risk of audits, expensive penalties, and further IRS action. If you’re unsure how to navigate filing on your own or don’t feel you have enough time to do it right, find an expat tax accountant you can trust and delegate tax prep to them.
2. Make a Plan to Meet All Your Filing Requirements
Next, outline your other filing requirements so you can also meet them. Common requirements include filing the FBAR to report foreign bank accountants, filing a State Tax Return if required for you, or filing a tax return for your business.
Greenback offers a variety of services to make sure your tax preparation is a hassle-free experience, no matter what you need to file.
3. Get Caught Up on Your Expat Taxes ASAP (If Necessary)
If you’re behind on your expat taxes, make arrangements to get caught up as soon as possible.
But, If you’re only one or two years behind, file late expat tax returns ASAP to get back on track. If you’re several years behind, you might be able to use the Streamlined Filing Procedures to catch up penalty-free.
IMPORTANT Serious tax evaders and major delinquents can face severe repercussions for their actions. The Internal Revenue Service (IRS) can revoke the passport of a U.S. citizen who owes taxes, as well as jail time, in addition to charging a variety of penalties for failure to file or pay taxes.
4. Stay Organized to Make Your Taxes Easier
Once you know the requirements, filing expat taxes is significantly easier. However, you might still find it challenging to gather your expat tax documents every year.
To make the process faster and easier, keep track of important documents throughout the year. That way, when it’s time to file, you’ll have everything you need!
If you're feeling overwhelmed or confused about US expat taxes, don't worry, you're not alone. At RP Financial Services, we specialize in helping US expats navigate the complexities of the US tax system, and we're here to help you too. Our experienced and knowledgeable team of Enrolled Agents can provide you with personalized guidance and support to ensure that you are fully compliant with US tax laws and taking advantage of all the available deductions and credits.
We understand that every client's situation is unique, and we tailor our services to meet your specific needs. So, whether you need help with tax planning, tax preparation, or resolving IRS issues, we've got you covered. Contact us today at (720) 712-7724 or schedule your FREE consultation using the link: https://calendly.com/rpfs/consult-with-ea.
We look forward to helping you achieve your financial goals and securing your peace of mind.