Glossary - Must Know Tax Terms for the American Abroad
Expat tax preparation can be confusing! With our glossary of must know tax terms for Americans Abroad, it will be just a little easier. And MyExpatTaxes handles the rest!
Expat Specific Language
The most common expat tax benefit that allows qualifying U.S. expats to exclude up to approx. $100K USD/year of foreign earned income from U.S. taxation
Income from services performed abroad that you actively worked for (i.e. as an employee, self-employed).
Foreign investment income does not count!
- Bona Fide Resident Test: You’re a resident in a foreign country for at least a full tax year (Jan – Dec)
- Physical Presence Test: You’ve been out of the U.S. for at least 330 full days for a relevant 12-month period
The tax form you would use to calculate and claim the foreign earned income exclusion benefit!
Check out the form here
Generally, you can get a $ for $ (euro, pound, yen, etc.) credit from the income taxes paid to your host country against your U.S. tax liability.
Freaking out because you didn't know you had to file your U.S. taxes abroad?
This program allows you to catch up with your taxes by just filing 3 back years of tax returns + 6 back years of FBAR (as applicable). Yes, we support this in our app!
Any financial account (bank, pension, investment vehicle, etc.) that is located outside of the U.S.
Foreign Bank and Financial Account Report - a.k.a what you need to submit to the Financial Crimes Enforcement Network (not IRS) every year if you have over $10,000 total from all your foreign financial accounts. Read more about the FBAR here.
Foreign Account Tax Compliance Act - a.k.a. why you need to sign a million U.S. / IRS documents when opening a bank account abroad. This federal law requires foreign financial institutions to report any of their financial accounts owned by U.S. citizens back to the states, while also requiring U.S. citizens to disclose this information themselves.
Other Tax Refunds, Credits & Things to Be Aware Of
Like many other countries, the U.S. will provide financial assistance to parents in the form of tax credits/refunds. So if you have a child (with a SSN), you might be able to get money back even if you don't end up paying any income taxes to the U.S. Our app will quickly figure out if you can get this refundable credit, which is up to $1,400 per child per year.
The Basics (In Case You Need a Refresher)
If you have gross income over your filing status threshold amount below, then you are legally obligated to file your annual U.S. tax return. Gross income includes everything from salary, unemployment compensation, investment income, pension income, etc.
Single
- $12,000 if under age 65
- $13,600 if age 65 or older
Married filing jointly:
- $24,000 if both spouses under age 65
- $25,300 if one spouse under age 65 and one age 65 or older
- $26,600 if both spouses age 65 or older
Married filing separately — $5 for all ages
Yes, if you are married to a non U.S. citizen, who does not want to sign up with the IRS so that you can file as "married filing jointly", then you probably need to file if you have income. And yes, $5 is a very low threshold...
Head of household:
- $18,000 if under age 65
- $19,600 if age 65 or older
Qualifying widow(er) with dependent child:
- $24,000 if under age 65
- $25,300 if age 65 or older
Or if you had net earnings from self-employment of at least $400.
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Single
self-explanatory
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Head of Household
you have a qualifying dependent and are not married
OR you are married to a non U.S. citizen and are paying for more than half of the costs to keep up your shared home.
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Married Filing Jointly
you are filing with your spouse, who has either a SSN or ITIN
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Married Filing Separately
you are married but choose not to file with your spouse, either because they are not a U.S. citizen and would rather not sign up with the IRS or they are filing their own U.S. return.
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Qualifying Widow:
you have a qualifying dependent, your spouse has passed away two years ago or less and you have not remarried
(we are sorry for your loss... let us at least help make sure your tax return is optimized).
The IRS provides a standard deduction (i.e. up to that amount of gross income is tax-free) or you can itemize expenses to lower your tax bill. The 2018 standard deduction amounts are:
- Single or married filing separately: $12,000
- Married filing jointly or Qualifying widow(er): $24,000
- Head of household: $18,000
Like dinosaurs, these use to exist but no longer do in 2018!
In 2017 and prior, you would get an additional "buffer" to lower your tax bill depending on how many people you're financially responsible for.
The end result of a quite complicated math equation (we handle this for you!) to understand how much of your gross income is actually taxable to the U.S. This includes all forms of gross income, then takes into account adjustments, deductions and expat only exclusions.
A qualifying child or qualifying relative, other than you or your spouse, who you're financially responsible for.
Includes salaries and net earnings from self-employment earnings - basically income that you actively worked for.
Does not include passive income (i.e. investment) or certain financial payments such as scholarships or unemployment compensation.
Sources:
A mix of IRS definitions (https://apps.irs.gov/app/understandingTaxes/student/glossary.jsp) & MyExpatTaxes’ translation into everyday speak!
