As an American who’s relocated abroad, getting acclimated to the expat lifestyle and immersing yourself in the culture, language, and customs of another country, staying on top of your US tax filing obligations and knowing how your living and working abroad affect your US taxes, is understandably not the first thing on your mind! But many American expats remain unaware that in most cases, they still have a requirement to file their US federal income tax returns while living and working overseas.
Here are some key facts to know about US federal tax laws and how they impact you, as an American expat living abroad:
As an American Living and Working Abroad, You Likely Still Need to File a US Federal Tax Return Every Year
All American citizens and green card holders residing abroad and earning foreign-sourced income still have an ongoing requirement to file their US federal returns and pay US federal income taxes due, unless their gross income is below the minimum income threshold, based on the taxpayer’s filing status.
Just the same as American taxpayers living in the US, you will need to file your US federal tax return on Form 1040 for the previous tax year, provided that your income was above a certain threshold, which varies depending on a taxpayer’s filing status – the lowest being $5 for a married taxpayer filing separately. The filing thresholds are exactly the same as for American taxpayers living and working in the US.
US Income Taxation is Citizenship-Based, and American Citizens and Green Card Holders Are Taxed on Worldwide Income
Under US tax law, American citizens and green card holders living abroad are subject to US federal income taxation on their worldwide income, irrespective of where the income was derived – so income generated abroad by American expats is subject to US federal taxation, just as income generated by US taxpayers within the US is.
As an American expat living abroad, you will likely have a US tax filing obligation if you have personal income such as wages, salary, commissions, pension distributions or alimony payments; investment income such as interest, dividends, or capital gains; or income from rental property – even if all of the income was from foreign sources, and is also taxed by a foreign country. The same is true even for an American citizen or green card holder who has never even set foot in the US.
You may also have US tax filing obligations even if you don’t have any income, but are married to someone who did have income.
A US Federal Tax Return Filing Requirement Doesn’t Always Mean You Owe Any Taxes – Especially As An Expat
As outlined above, American citizens and green card holders usually must file a US federal tax return annually, even if they reside abroad. Fortunately, however, very often American expats do not owe any US federal income tax on their returns as filed. Why is that?
The reason is that the IRS provides American citizens and green card holders residing abroad with several mechanisms to exempt most if not all of their foreign income from US taxation, and often completely offset their US tax liabilities. These are:
- The Foreign Tax Credit (FTC) claimed on Form 1116
- The Foreign Earned Income Exclusion (FEIE) claimed on Form 2555
- The Foreign Housing Exclusion (FHE), also claimed on Form 2555
- Income Tax Treaties with Foreign Countries, to exclude other types of income from US taxation
Your Income as an Expat Usually Will Not Get Double Taxed
A common situation that arises for American expats living abroad full-time is that, as they qualify to become residents of the foreign country in which they live, their foreign-earned income could potentially become doubly taxed – by both their foreign country of residence and the US.
To help mitigate this double taxation, US federal tax law provides a provision known as the Foreign Earned Income Exclusion (FEIE) claimed on Form 2555. The FEIE allows a qualifying taxpayer (basically, an American citizen or green card holder who has resided abroad for at least 1 calendar year, or been physically present outside the US for 330 days in a 12-month period) to exclude a certain amount of foreign earned income from US taxation. For tax year 2021 (filing in 2022), expats are permitted to exclude up to $108,700 of income earned abroad from their US taxes.
American expats should note, however, that the FEIE only applies to foreign earned income; other income, such as interest, dividends, capital gains, pensions, US-sourced income, etc., cannot be excluded using the FEIE, and are fully subject to US taxation. Also note that if your spouse is an American citizen or green card holder and also has foreign earned income, he or she can also claim the FEIE against his or her own income, up to the same maximum exclusion amount cited above.
Another key provision to help mitigate double taxation is the Foreign Tax Credit (FTC), claimed on Form 1116. If an American expat’s foreign income is taxed by a foreign country, the tax can be claimed as a tax credit on the US return, reducing the US tax liability dollar-for-dollar, often substantially. However, American expats should note that the FTC cannot be claimed for foreign taxes paid or accrued on foreign earned income excluded using the FEIE. In other words, you can only claim the FTC for foreign taxes paid or accrued on the same income that the US is taxing.
Even If You Owe No US Tax Thanks to Using the FEIE and FTC, You Still Must File a US Federal Return
Even if as an expat your US federal tax liability is reduced to zero after applying the FEIE and/or the FTC, you are still required to file a US federal tax return for that tax year.
You May Have Additional Filing Requirements as an Expat, Due to IRS and Treasury Department Increased Compliance Enforcement
As an expat you may have heard the term FATCA, and know that it relates somehow to increasing IRS and Treasury Department tax compliance efforts against tax evasion by US taxpayers holding financial assets abroad. FATCA stands for the Foreign Account Tax Compliance Act, which was enacted by the US Congress in 2010 to combat tax evasion abroad, and came into force on July 1st, 2014.
Under FATCA, US taxpayers with foreign-registered financial accounts and assets must report them on Form 8938 (filed together with the taxpayer’s US return) if the taxpayer is living abroad and has a total of over $200,000 at the end of the year, or $300,000 at any time during the year. If the taxpayer is married and filing jointly with a spouse, the reporting thresholds are higher: over $400,000 at year-end for a married couple living abroad or over $600,000 at any time during the year.
American expats also need to keep in mind that they may have an annual requirement to file an FBAR report on FinCEN Form 114, Report of Foreign Bank, and Financial Reports. An FBAR report must be filed with the US Department of the Treasury if a US person, at any point during the year, had a combined highest balance of more than $10,000 in all of his or her foreign bank and other foreign financial accounts, including investment, pension, and insurance accounts.
