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US Expat 101: How to File Taxes While Living Abroad

us expat 101

How in the world do you file taxes while living abroad as an American expat? Or why for that matter? Especially if you’re an American working abroad taxes can be confusing. Why is there a need to report your worldwide income to the IRS every year?

Living and abroad and paying taxes is defined in your passport. Both Americans in the United States, and abroad are by law supposed to file a tax return every year. So, any and all questions with “does a US citizen living abroad have to pay taxes?” is a possible yes.

If you earn over the filing threshold, it is important to file to keep the IRS informed you are still honoring your American responsibility. US tax rules for expats can help you stay in line to avoid tax penalties and consequences. Furthermore, find out how to avoid US taxation on foreign income.

While expat tax filing is an obligation, what if you’re not sure if you need to file? If you are a US citizen living abroad with one of the following:

  • Personal income through salary, wages, rental properties, commissions, tips, pension funds, capital gains, alimony, US or foreign social security, dividends, royalties, inheritance, interest… then you definitely need to file!
  • Are an Accidental American – you left the country shortly after you were born, and thus still are considered a US citizen and must report your worldwide income to the IRS… then you must file!
  • Some of or all of your income were already taxed or will be taxed by a foreign country, then you will need to file to ensure you are not double taxed!

Income Threshold for US Expats

Filing Taxes Abroad

The following filing thresholds are for both US citizens abroad and on the homeland for the tax year 2018.

If your total yearly income is at or above the following numbers, then you need to file a tax return to the IRS of the Federal government:

Single under age 65 $12,000
Single age 65 or older $13,600
Married filing jointly, both spouses under 65 $24,000
Married filing jointly, one spouse age 65 or older $25,300
Married filing jointly, both spouses 65 or older $16,600
Married filing separately, any age $5
Head of household under age 65 $18,000
Head of household age 65 or older $19,600
Qualifying widow(er) under age 65 $24,000

A key point in filing and paying taxes is to stay empowered and get money back, so it’s best to maximize the opportunity which you can easily do through our service and software.

The due date to file the 1040 Form is generally due on the same day of every year – April 15th. US expats, however, have the opportunity to extend this due date farther to June 15th (or even to October 15th by filing an extension).

Living Abroad as a US Expat can cut through tax strain

There is no US foreign income tax calculator or US expat tax rate per se, but simply must-know tax strategies for Americans abroad. Therefore, the stress of living abroad and paying US taxes process can be cut down because of the following 2 tax benefits:

Foreign Earned Income Exclusion

One is called the Foreign Earned Income Exclusion (FEIE, or Form 2555). This benefit allows you to exclude a certain amount of foreign earned income from any US tax. So for this tax year (2018), you can exclude up to $103,900.

For an example on how to calculate foreign earned income exclusion:

  • You earned $112,800 in 2018, so subtract your yearly salary from the exclusion rate ($103,900) leaving $8,900 that becomes taxable by the IRS.

BUT something to remember is that the taxable amount is taxable at the rate applying to what you originally earned (called the stacking rule). Your exclusion will only apply to foreign earned income too! Any other income from pension funds, interest, capital gains, etc cannot be excluded with the FEIE. Also, you can increase your foreign exclusion with qualified housing expenses as well.

Foreign Tax Credit

The second benefit and way to reduce your US tax bill as an American abroad are through the Foreign Tax Credit (Form 1116). This benefit is great for US families abroad because it allows them to claim the refundable additional child tax credits of up to $1,400 per qualifying child.

So if your income was taxed by a foreign country (because you’re working abroad), you can subtract the amount of tax from your US tax. This most likely helps you lessen your US tax bill. However, make sure to remember that claiming the foreign tax credit on your foreign taxes related to income excluded from Form 2555 is not allowed.

Seem complicated? You can read more upon the FEIE and Foreign Tax credit here.

Combining FEIE and Foreign Tax Credit

Though just because you can use one or both of these benefits, does not mean you can skip the filing process! US American working overseas taxes are very important to take care of.

It is also possible to combine the FEIE with the Foreign Tax Credit through applying to the Foreign Tax Credit which will reduce your US tax bill to as low as zero. And even if you calculate your tax bill to get down to zero, you still have to file your US taxes.

Then, if your spouse (who is an American abroad like you) has foreign income, they can also apply through the FEIE and get up to $103,900 for their earnings.

If you have claimed the FEIE in the last years using Form 2555, and you want to use only the Foreign Tax Credit – then you cannot go back to the FEIE within the next 5 years! Unless you are granted permission from the IRS to do so. Therefore, it is only advised to switch if you will continue to stay in a high tax country and believe you will be able to claim a refund for the next 5 years.

Your Social Security

When you do your taxes, you must have a social security number. If you don’t have one of those, take a look over at one of our recent blogs here where we talk about the importance of getting an SSN.

Having a social security number stays with you for the rest of your life and helps ensure that your tax submissions are successfully recorded by the IRS.

Your Passport

The IRS does have the right to take away your US passport if you are delinquent on your taxes. Have no fear though, as this should only happen if you have tax debt is over $51,000. By claiming the right expat tax benefits and filing timely, you should never get to this worst-case scenario.

Your Foreign Bank Account

The truth is, the IRS wants to know exactly how much you are earning while living abroad as a US expat. Specifically, the amount of money in your foreign bank account, how it got there, and if your income has created any money through capital gains and/or interest.

As one of the US tax laws for citizens living abroad, the FBAR and FATCA are two different types of reporting requirements that will be addressed for your foreign bank account. 

The FBAR

The Foreign Bank Account Report (FBAR) must be filed if the total amount of foreign holdings are over $10,000 or more at any one time during the tax year. This also includes any non-US accounts that have just your signature authority on them.

The FBAR is a form that must be filed online/electronically via FinCen Form 114. This form is connected to the Department of Treasury and should be filed by the normal tax deadline – April 15th – every year. However, US expats do have an automatic extension to get this done by October 15th.

This is separate from filing Form 1040, so make sure you complete both forms if you also need to participate in foreign tax reporting. Additionally, Form 8938 (see below) is also used when reporting your foreign bank account income to the IRS!

The FATCA

The Foreign Account Tax Compliance Act is the law surrounding Form 8938. This form also needs to be filed along with Form 1040 if any of your foreign assets go over one of the following limits: 

Single or Married Filing Separately while living abroad as an American:

  • Your total foreign holdings worth $200,000 or more on the last day of the US tax year (April 15th) OR were more than $300,000 at any time during the tax year,

Married Filing Jointly while living abroad as an American:

  • If your total foreign holdings are worth $400,000 or more on the last day of the US tax year (April 15th) or were more than $600,000 at any time during the tax year.

Since 2015, foreign banks under the authorization of the IRS must report to the IRS Americans’ income within their bank accounts. This is why it’s important to file the FBAR and FATCA (Form 8938) correctly.

Don’t worry, here at MyExpatTaxes we can help you answer “how to pay US taxes while living abroad” and file these two forms. We will also make sure you are reporting the correct information to the IRS regarding your foreign bank account and holdings. Our US citizen abroad tax professionals can help you avoid double taxation, penalties, and stay compliant with the IRS. Plus, we’re there to show you the way on how to file taxes while living abroad.

The Simplest Way to File US Taxes While Living Abroad

Interestingly enough, you can sign up through our app to really see and experience a fast, effective and smooth way to file your US expat taxes while abroad. MyExpatTaxes is a user-friendly software that walks you through an easy-to-navigate interface where you plug in the necessary information according to your tax profile and the software will do the rest. It will clearly help you how to file taxes while living abroad.

US citizens living abroad taxes can be a nightmare. Let us take care of the hard stuff for you. Our American tax professional CEO Nathalie Goldstein has created a team that will put you more at ease and satisfied with your tax profile with the IRS. Our customer reviews can assure you of that. We answer questions like “do expats pay US taxes” and other concerning topics on a daily basis – serving expats in 100 countries and growing!

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