If you’re an American citizen living outside of the United States, you should still consider your taxes. Although it’s very tempting to believe that you’re already exempted from filing federal tax returns by virtue of your distance from the US, paying taxes abroad is still your obligation even if you take residence in another country.
To help clarify matters, here are several important things that you should know about paying taxes abroad:
- Do American citizens living in a foreign country have to pay taxes?
The answer is a resounding yes. If you are an American who is living in a foreign country as a US citizen, then you must file a federal income tax return and pay American expat tax, regardless of where you’re living during that time. You are subject to the same regulations involving income taxation as those who are living in the US.
- How much taxes do American expats have to pay if they work overseas?
The US tax system taxes foreign income at the same rate as any income that is earned inside the country. This means Americans who are living abroad, or Green Card holders, will need to file a US federal tax return this year if your overall income in 2020 — no matter where it was earned — is over any of the following thresholds:
- For citizens filing as Single: $12,400
- For citizens filing as Married Filing Jointly: $24,800
- For citizens filing as Married Filing Separately: $5
- For citizens filing as Self-Employed: $400
- For the head of household: $18,650
Thus, regardless if you have not resided in the US during the year and earned all of your income in another country, the Internal Revenue Service or IRS still expects you to file a tax return. You may also be asked to file a state tax return depending on where you resided before you moved abroad, which can further complicate the question of how much taxes you have to pay if you work in another country.
- American expat get a two-month filing extension
American taxpayers living outside of the US get a two-month extension. This means rather than filing their tax returns on April 15, they have until June 15 to do so.
- Failing to file would mean you can’t claim foreign earned income exclusion and may also be liable for penalties
American expats can exclude up to $107,600 if they meet the qualifications for foreign earned income exclusion or FEIE. Take note, though, that you have to file to qualify for this exclusion as it is not given automatically. You must be eligible to use the FEIE but you must also elect it by filing Form 2555 or 2555-EZ.
Once you elect to use the FEIE, it will remain in effect and you will include it on your tax return each year. But if you decide that you no longer want to use it, you cannot claim the exclusion for the next five tax years without getting approval from the IRS.
- Avoiding US expat double taxation on foreign income
An issue that often arises in the US tax system is that someone could theoretically be doubly taxed on their income earned, by the country of their residence and the US. This situation is of note for any American who is living full-time in another country, who may qualify as a tax resident in other tax systems. To elude this tricky situation, the US tax code has the FEIE and under this, expats are allowed to exclude $107,600 ($108,700 for 2021) of income earned abroad from their US tax obligation.
One provision that can also help lessen double taxation is the Foreign Tax Credit. With this, Americans who are earning income in a foreign country may lessen their tax obligation beyond the limits of the FEIE if they have paid or accrued tax to a foreign government. However, this provision is a complex one as it can only be applied to specific kinds of income and there are also distinct considerations related to different foreign countries.
- Carefully track travel time to make sure you qualify as an expat
If you plan to qualify using the Physical Presence Test, you must be wary of your travel days. You must be physically present inside a country outside of the United States for 330 full days. Also, take note that any time you spend traveling either by air or sea to and from the US will not count. So, you must be careful in keeping track of your travel dates as a small error in calculation could cost you thousands of dollars in US expat taxes.
- Other requirements for taxes for expats
When it comes to filing your US federal tax return, there are also other items that you need to report apart from your earned income. The IRS mandates that you divulge your foreign accounts and assets that go past a specific value threshold.
- How do expats file taxes?
You can always prepare the tax return yourself. However, be aware that tax preparation for taxes for US expat taxes can be complicated and there may be credits and deductions that can get omitted if you are not well-versed. For this, you should contact the TFX tax experts, so you can get your tax return prepared by an experienced CPA.