April 18th 2011 is the tax-filing deadline for all US citizens, even those living overseas. The close of 2010 saw some changes to US tax laws that will impact the non resident tax returns for US expats living and working overseas.
In this special article we take a look at some of the frequently asked questions about American expat’s tax requirements for the 2010/2011 tax year.
1) Do American citizens living abroad have to pay tax?
If you are a citizen of the United States then you are required to file income, estate and gift tax returns no matter where in the world you are currently living. All income is subject to US tax. Even if you have already paid tax in your host country you are still required to complete and return your US tax return and you may still be required to pay tax in the US.
2) What is considered to be income?
Your U.S. income tax return must cover all of the following:
- Foreign dividends
- Any rental income earned at home or abroad
- Foreign pension income
- Foreign capital gains or losses on stocks, bonds, real estate
- Foreign royalties
- All other foreign income
3) What is the deadline for filing my non resident tax return?
All overseas US residents are required to file their tax return by the 15th June 2011. This is actually a 2-month extension on the deadline for resident US citizens. However, despite the extension, you are still required to pay all due tax by the 18th April in order to avoid any unnecessary interest charges. If, for some reason, you require an extension to the deadline you may apply for this by filing Form 4868 before June 15th. You can do this yourself online or through an authorized tax professional. If you do request an extension you should be aware that any payments made after June 15th will be subject to interest charges.
US Expats should note that the state deadline may be different and they should verify this before April 18th in order to ensure that they file their state return on time (especially those from California, New Mexico, South Carolina, or Virginia, where Expats are required to file state taxes).
4) What is the process for filing a tax return?
The IRS no longer send non resident tax return forms through the mail and you will be required to download Form 1040 online or obtain a copy of it from the US Embassy or an international tax professional.
US citizens living abroad need to send their returns by mail if they meet any of the following criteria:
- You claim the foreign earned income exclusion.
- You claim the foreign housing exclusion or deduction.
- You live in a foreign country or are a resident, for tax purposes, of a foreign country.
- Complete Form 1040 and send the completed tax return to the following address:
Department of the Treasury
Internal Revenue Service Center
Austin
TX 73301-0215
USA
Estimated tax payments should be mailed with Form 1040-ES to:
Internal Revenue Service
P.O. Box 1300
Charlotte
NC 28201-1300
USA
5) I earn money in an alternative currency to USD, how do I account for this?
All amounts recorded on your tax return should be in USD. If you are paid in an alternative currency then you need to translate that amount into USD. The best method of doing this is to apply the yearly average exchange rate, this can be found here: Yearly Average Currency Exchange Rates.
6) What’s the earnings threshold/ income exclusion for the 2011 return?
The first $91,500 USD of foreign earned income will be tax-free, provided your tax return is submitted on time. The key words here are earned income. Rental income, dividends, interest, capital gains etc. are not classified as earned income and will be subject to taxation.
7) What other exclusions may I be entitled to?
You may also be entitled to the foreign tax credit and/or foreign housing exclusion.
8) What is the foreign tax credit and how do I know if I am eligible?
The United States has a number of agreements in place with some foreign countries that help to prevent US citizens from experiencing high levels of dual taxation. If you are based within a qualifying country you may be permitted a lower rate of tax and, in some cases, may be completely exempt from US taxation. You can find a list of the countries that have tax agreements in place in IRS Publication 901.
In order to claim foreign tax credit you need to complete Form 1116.
9) What is the foreign housing exclusion and how do I know if I am eligible?
The foreign housing exclusion allows expats to offset some of their living costs against their tax payment. In order to be eligible for this you need to demonstrate that you are a bone fide resident in your host country. This means proving that you were resident in the same foreign country the entire year and that you were physically absent from the US for 330 days of any 365-day period.
The foreign housing exclusion is calculated by deducting the “base amount” from your qualified foreign housing expenses. The base amount is 16% of the maximum foreign earned income exclusion amount, which is $14,864 for 2011. There is also a limitation on the maximum amount of qualified housing expenses. This limit for most cities is 30% of the foreign earned income exclusion ($27,870 for 2011). Please note that there are numerous exceptions (cities with higher limits). These exceptions can found in IRS Notice 2011-8.
For full information about the regulations and rules governing US citizens who live abroad please see the “meeting obligations at home” section of our free Expat manual. It contains comprehensive information about citizenship, taxation, health care, education and social well-being and tells you everything you need to know as a US citizen living abroad.
Please note that this article is only intended to provide high level information to American expats living abroad and to point tax payers in the right direction. All effected parties should seek professional advice when filing their tax return and are strongly urged to use the services of a qualified tax expert.
