The United States taxes their citizens on their worldwide income, irregardless of where that income is earned and where the individual lives. We’re going to go through the main topics below to help you make sense of the complicated rules associated with US Expat Taxes.
1 - The Foreign Earned Income Exclusion
US citizens who live and work abroad are be able to minimise tax on their expat tax return by claiming the foreign earned income exclusion. To qualify, a US citizen or resident alien must have earned income in a foreign country (e.g. salary or self employed income), a regular place of business outside the US, and must meet the bona fide residence or physical presence test.
If you qualify for the foreign earned income exclusion on your US expat tax return, you may also qualify for the foreign housing credit, which allows you to deduct a portion or all of your foreign housing costs.
2 - The Foreign Tax Credit
For US citizens living abroad, you can be taxed by your host country and the United States. The Foreign Tax Credit was introduced by the IRS to reduce double taxation on US expats. US citizens may elect to claim a credit for foreign income taxes paid on their US expat taxes. When preparing the US tax return, we review whether we claim the Foreign Earned Income Exclusion or the Foreign Tax Credit, or in some instances a mixture of both.
3 - Using Foreign Exchange Rates
For US expat tax returns, all the figures should be reported in US dollars. The IRS asks that each transaction is converted to US dollars at the daily rate, but for transactions that occur throughout the year, you can use the average exchange rate for the year. We use Oanda.com, where you can find daily and historical exchange rates.
4 - Social Security
For US citizens living abroad, you are still entitled to receive Social Security benefits. The United States has developed agreements with many countries to ensure your benefits are protected.
5 - Do You Have to File State Taxes?
Each of the fifty states varies in whether they want you to file a state tax return as an expat.
Some states have no personal income tax, e.g. Florida, Texas and Washington.
Some states, such as California and Virginia, hold on to their previous residents more closely. If you still own assets, have financial accounts or a driver’s license in that state - then they may still require you to file a state tax return.
6 - Foreign Bank Accounts
US citizen that have foreign bank accounts and the cumulative balance of these accounts exceeds $10,000 at any time during the calendar year, you must file Foreign Bank Account Reporting (FBAR) forms by June 30 following the end of the tax year.
The FBAR forms are separate to your expat tax return and are filed online with the US Treasury.
7 - Dates for Filing
US citizens are required to file their US tax returns by April 15. If you were living abroad on the due date, you are entitled to an automatic extension to file your US expat taxes to June 15. If you owe any US tax, the payment is still required by April 15.
8 - Streamlined Filing Process
While you are living overseas, as a US citizen, you are still required to file US tax returns and report your worldwide income.
If you haven’t been filing your US expat tax returns, the IRS currently has an amnesty where you can catch up on your US tax returns. You will need to file the last 3 US tax returns that are overdue. You will also need to file FBAR forms for the last 6 years.
By using the Streamlined Filing Process, any penalties are waived - for both the tax returns and the FBAR forms.
9 - Getting an extension
If you are living overseas, you receive an automatic extension to June 15 (following the end of the tax year).
You can request an additional extension to October 15 using form 4868. The extension needs to be requested by June 15 to be effective.
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