Many Americans living abroad are unaware of the fact that they need to file a US tax return each year. This includes expats who have been living outside of the US for just a few months, and US citizens who were born outside the states but have citizenship. Expats are required to file tax returns even if they have no income in the US and they pay taxes to a foreign government.
While it is required for expats to file a yearly tax return, there are several tools that the IRS gives to reduce or eliminate the total tax bill. The first is the Foreign Earned Income Exclusion. This tool allows the taxpayer to exclude up to $100,800 of income earned abroad from the taxable income. This means that if an expat earns less than $100,800 and meets all the requirements, then the taxpayer can expect to owe no taxes to the IRS. However, the expat is still required to file a tax return. If a taxpayer revokes this exclusion then it cannot be used for the next five years. For this reason, it is important to plan ahead when revoking the Foreign Earned Income exclusion.
The second main tool that the IRS gives to expats is the Foreign Tax Credit. These are credits given to a US taxpayer for money paid to a foreign government. The taxpayer can use these credits to reduce or eliminate a US tax bill. If a taxpayer paid more money to a foreign government than the taxpayer would otherwise owe to the IRS, then it is possible that the taxpayer will owe little or no taxes. For example, if a taxpayer would owe 100 dollars to the IRS, however the taxpayer already paid 150 dollars to France on that same income, then the taxpayer can use the Foreign Tax Credit to reduce the taxes owed. There are some exclusion ratios and limitations, so the taxpayer should consult with an expat tax professional when calculating the amount of the tax credit that can be used. These credits can also be carried forward or backwards to reduce the tax bill in future or prior years.
Many countries have tax treaties with the United States. Each treaty is different and lays out different rules and regulations for a taxpayer living in another country. For more information on the US tax treaty, see http://universaltaxprofessionals.com/2016/01/26/what-is-a-us-tax-treaty/.
In addition to filing a tax return, a US citizens (living in the US or abroad) also need to file an FBAR if he or she has over $10,000 in aggregate in foreign financial accounts. Financial accounts include bank accounts, brokerage accounts, and pension accounts. In addition, any account with signature authority needs to be included on the FBAR.
About the Author:
Joshua Katz, CPA is the founder of Universal Tax Professionals, a US expat tax firm dedicated to helping Americans living abroad with all their tax and accounting needs. Joshua can be contacted directly at [email protected].