Tax Tips for U.S. Americans Abroad
Most expats do not pay US taxes because of the Foreign Earned Income Exclusion or Foreign Tax Credit benefits. However, expats still need to file taxes annually, even if they do not owe any taxes to the IRS. This holds true for the massive number of US expats that have gross worldwide income over the filing threshold.
US Citizens are taxed on their worldwide income
Per the IRS, American citizens living abroad are still subject to US taxation on their worldwide income, no matter where they live or work. Therefore, expats need to combine their US and foreign income together to determine if they need to file.
US income for expats normally includes investment or rental income. If you receive Form 1099 abroad, that means that the IRS has a record of your income earned. Foreign income for expats normally includes their expat salary meaning, income earned as an employee abroad.
The income filing threshold is usually based on the standard deduction of each tax filing status. However, those with non-US spouses are normally considered filing separate and have an extremely low filing threshold of only 5 US dollars.
US Taxation of foreign income
The United States may be one of two countries to enforce citizen-based taxation, however, most countries already tax foreign income.
The US tax laws for citizens living abroad is essentially the same as for those living in America. Expats can file the same Form 1040 and are subject to the same US federal income tax rates.
In addition, the IRS provides a couple of options to prevent the double taxation of expats. Expats can either:
- exclude their foreign earned income from US taxation
- use foreign income tax paid as a tax credit against US taxes owed
- exclude other income types from US taxation using a valid tax treaty
There is one catch in regards to foreign investment income; that it can be classified as PFIC investments. These will not be eligible for the favorable 20% US capital gains taxation.
When to file using the Foreign Earned Income Tax Exclusion (Form 2555)
First off, what is the Foreign Earned Income Exclusion (FEIE)? FEIE is an expat tax benefit, allowing qualifying expats to exclude up to $105,900 in 2019 from their US taxable income.
We normally recommend expats to use the Foreign Earned Income Exclusion if:
- they pay low to no income tax in their host countries
minimalUS –sourced income, which is lower than the standard deduction
- they do not have or plan on having children, who will register for US Social Security Numbers
FEIE, although the most common expat tax benefit, can be limiting if you wish to:
- contribute to your US retirement accounts (i.e. IRA)
- claim your refundable tax credits (i.e. Additional Child Tax Credit)
One other con from using Form 2555 right when you move abroad, is that once you start, you cannot stop excluding your foreign earned income with FEIE without incurring some consequences. The IRS will generally not allow you to use Form 2555 again for five years once you decide to stop using FEIE in exchange for another expat tax benefit.
If you live in a country with a high-income tax rate, such as within the European Union, there is no real reason to using Form 2555, since you can just use the Foreign Tax Credit approach.
For those who pay low or no foreign income tax, such as employees in an international organization, then the FEIE and Foreign Housing Exclusion is really the only way to go! The Foreign Housing Exclusion allows expats to deduct some costs of living abroad.
FEIE can only be used by Americans living abroad, who can prove that:
- they have a residence for tax purposes in a foreign country
- are present in a foreign country or countries for at least 330 full tax days in a 12 month period starting or ending in the tax year
When to file using the Foreign Tax Credit
benefit (Form 1116)
The other common tax credit for US expat taxes is the Foreign Tax Credit, claimed by completing Form 1116. This benefit is used to prevent US expat double taxation. For every euro, pound, dollar, you pay in income taxes to a different country, you can re-use as a credit against your US tax liability.
For example, US Citizens paying UK tax can claim their UK income taxes on Form 1116. The US tax rules for expats allow the portion of taxes allocated to foreign income to be offset by any foreign income tax paid.
US Expats should use Form 1116 when they:
- pay more income tax in their host country – then they would be based on the US Expat Tax Rate (same as the tax rates for Americans back home)
- have investment and other types of “unearned” income, that cannot be excluded with Form 2555 anyways
- earn more than the foreign maximum exclusion ($105,900 in 2019)
Form 1116 can be used in addition to Form 2555, to account for income tax for amounts that are not excluded with the FEIE. However, income tax directly allocated to any excluded income must also be excluded.
Even though Form 1116 can be a rather difficult form to complete, we do suggest expats to use it if they have enough foreign income tax credits to reduce their US taxes to zero!
When to file using a Tax Treaty benefit (Form 8833)
Every American abroad should be familiar with the tax treaty between the US and the foreign country they call home. Otherwise, they can look to use a dedicated US expat tax software, like MyExpatTaxes, which accounts for tax treaty benefits!
Most tax treaties will outline which country has the tax rights on different types of income such as:
- Social Security Benefits
- Pension Income
The international tax treaties can even outline how capital gains tax of US Citizens living abroad are treated.
On Form 8833, Treaty-Based Return Position Disclosure, expats (or our expat tax software) will inform the IRS of:
- which tax treaty is used
- the specific article of the tax treaty
- explain the treaty-based return position such as income being exempt
Common US Expat filing mistakes
The most common US Expat filing mistakes are when taxpayers do NOT
- Include Form 2555 or Form 1116 in your expat tax filing
- Claim the additional child tax credit
- File an extension after June 15th
- File an FBAR with your tax return
Even some of these mistakes can happen when using professional US expat tax services. Most tax firms will use Form 2555 rather than Form 1116 due to the popularity and ease of using the form. Even if families abroad are eligible for the Additional Child Tax Credit refund of up to $1,400 per qualifying child.
Simply not filing US taxes is another mistake that Americans abroad and Accidental Americans can make. However, this mistake like the others above can be fixed. For those not filing their US taxes, they can use the US Expat Tax Amnesty Program, the Streamlined Filing Compliance Procedure explained here.
When do expats end up paying US taxes
A US Citizen abroad tax bill normally only happens when expats
- have US-sourced income, which is over the standard deduction, thus subject to US income tax
- do not pay enough foreign income tax on unearned foreign income, which is still subject to US taxation (i.e. capital gains on foreign property sold)
How to file, pay and ask for support from the IRS from overseas
Americans abroad are encouraged to electronically file either through our expat tax software, or a US Expat tax firm that supports this service. Otherwise, the address to send US tax return (without a check) from abroad is:
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215
United States of America
Tax bills can be paid online directly here.
The IRS will not necessarily inform you when they received your US expat tax return. The only mail notices if they have questions. To check the status of your US expat tax return, you can use their “Where’s my refund” app here. If you are not expecting a refund, the only way to confirm that they received your mailed US expat tax return is to call them directly.
The IRS expat tax support phone number is: +1 267-941-1000
This number is not
We at MyExpatTaxes are here to answer any additional questions you have regarding taxes. Otherwise, when you’re ready to save money and file on time, just sign up through our app, and we’ll get started!