As an American Expat, you need to understand US Expat Taxes. Even if you are a tax resident in your new home, you may still have tax obligations to the United States. This article covers the basic requirements for filing US Expat taxes and explains who is required to file. We’ll explore how to claim various exclusions and credits, and the importance of foreign bank account reporting. We will also discuss some additional considerations for US Expats, such as state taxes, self-employment taxes, and social security and Medicare taxes.
Who is Required to File for US Expat Taxes?
Generally speaking, US citizens and resident aliens are required to file US taxes, regardless of where they live. However, there are some exceptions and special rules to consider.
One way to determine your tax filing status is through the physical presence test. This test looks at the number of days you were physically present in the United States during the tax year. You are considered a resident alien for tax purposes if present in the US for more than the minimum allowed time. Currently, the limit is 31 days during the tax year and at least 183 days over a 3-year period (including the current year).
Another way to determine your tax filing status is through the bona fide resident test. This test looks at your intention to live in a foreign country permanently or indefinitely. If you meet the requirements of this test, you may be considered a bona fide resident of a foreign country. This means you may not be required to file US taxes.
There are also special rules for certain individuals, such as military personnel and students. Military personnel who are stationed abroad may be eligible for tax breaks and extensions. Similarly, students studying abroad may be able to claim the foreign-earned income exclusion if they meet certain requirements.
Foreign-Earned Income Exclusion
The foreign-earned income exclusion allows US Expats to exclude a certain amount of their foreign-earned income from their US taxable income. Foreign earned income refers to income earned for services performed outside the United States. To claim the foreign earned income exclusion, you must meet certain requirements. These include being a US citizen or resident alien and having a foreign-earned income. You also need to pass the physical presence test or the bona fide resident test.
There are limitations on the foreign-earned income exclusion. The exclusion amount is adjusted annually for inflation. And, the amount may be limited based on your filing status and the amount of your foreign-earned income.
Foreign Tax Credit for US Expats
The foreign tax credit allows US Expats to credit foreign taxes paid on foreign earned income against their US tax liability. This credit can help reduce the overall tax burden for US Expats who are paying taxes in both the US and a foreign country. To claim the foreign tax credit, there are two qualifications. Firstly, you must have paid or accrued foreign taxes on foreign-earned income. Secondly, you must have sufficient foreign-earned income to offset the credit.
Like the foreign earned income exclusion, there are limitations on the foreign tax credit. The credit is limited to the US tax liability attributable to the foreign earned income. And it may be further limited based on the type of foreign tax paid.
Foreign Bank Account Reporting (FBAR)
There’s an additional requirement if you have a financial interest in or signature authority over a foreign financial account. You may be required to file a Report of Foreign Bank and Financial Accounts (FBAR). The financial account could be a bank account, brokerage account, or mutual fund. This report is used to help the US government detect and deter money laundering and tax evasion.
To meet the FBAR filing requirements, you must have a financial interest in or signature authority over a foreign financial account. And, the account must have an aggregate value of over $10,000 at any point during the tax year. There are stiff penalties for failure to file as part of your US Expat Taxes reporting, so be sure to remain on the right side of this!
Foreign Housing Exclusion or Deduction
If you’re living abroad, you may be able to claim the foreign housing exclusion or deduction. This benefit is a huge help to offset the high cost of housing in certain foreign locations. The foreign housing exclusion allows you to exclude a certain amount of your housing expenses from your taxable income. The foreign housing deduction allows you to claim a deduction for your housing expenses on your tax return.
You must be a US citizen or resident alien to claim the foreign housing exclusion or deduction on your US Expat taxes. You also need to show foreign-earned income and pass either the physical presence test or the bona fide resident test. There are also limitations on the exclusion or deduction you can claim. The limit is based on the amount of your foreign-earned income and the housing costs in the foreign location.
Tax Treaty Benefits for US Expat Taxes
The United States has tax treaties with many foreign countries that can help to reduce or eliminate double taxation for US Expats. These treaties may provide exemptions, reductions, or credits for certain types of income. Or, they may allow for tax credits or offsets based on taxes paid to the foreign country.
To claim tax treaty benefits, you must meet the requirements of the treaty and follow the proper procedures for claiming the benefits. There may also be limitations on the benefits that you can claim based on the specific provisions of the treaty.
In addition to the federal tax obligations, US Expats may also be required to file state taxes, depending on their state of residence. Self-employed Expats may also be required to pay self-employment taxes, including the Social Security and Medicare taxes typically withheld from wages.
Social security and Medicare taxes can be a particular concern for US Expats. The concern comes when foreign countries have social security systems that do not recognize or provide credit for US social security contributions. To avoid potential gaps in coverage, US Expats may want to consider enrolling in the US Social Security program or purchasing private coverage.
US Tax Deadlines for Expats
The deadline for filing your tax return is April 18, 2023. However, Expats qualify for an automatic 2-month extension, so the final date is June 15, 2023. In some circumstances, you may be able to request an additional extension to October 15, 2023.
What If You Missed a US Expat Taxes Filing?
The IRS doesn’t have a sense of humor, but they do have some understanding. If you have missed a filing after your move abroad, there are amnesty programs and ways to get back on track. However, if you have missed a deadline, we strongly suggest speaking to a qualified US Expat tax expert to help you. How you reach out to the IRS makes a big difference in how they treat you!
Remember, the consequences of serious tax evasion and major delinquency are severe. They can even include jail or the government revoking your passport. And, the fines often compound, meaning that your liability keeps growing as long as you ignore it.
So, if you haven’t filed or paid a past tax bill, it is in your best interest to deal with it immediately.
Making US Taxes Easy for Expats
In all the excitement of moving abroad, your US tax obligations as an Expat aren’t the most fun thing on the list. However, it is important for US Expats to understand their tax obligations and to plan and file their taxes properly. By claiming relevant exclusions, credits, and treaty benefits, US Expats can minimize their overall tax burden and ensure compliance with the US tax system.
Proper tax planning and compliance can help avoid potential penalties and ensure that you take advantage of all available tax benefits.
Have questions? Let Bright!Tax know. They are there to help!