Whether you are considering a move overseas or you are already living the expat lifestyle, it is important to remember that US expats must file a US tax return each year, regardless of where you live. The US is one of only a handful of countries that requires you to report your worldwide income, even when you are not a US resident. Expat taxes are often overlooked in an overseas move, so we wanted to take this opportunity to outline 5 things you may not know (but need to know!) about US taxes.
Most Americans are well aware of the April 15th tax deadline, but one of the benefits of being an expat is that you receive some extra time to prepare your US expat tax return. Here are your expat deadlines:
If you haven’t heard of FBAR (Foreign Bank Account Report), it’s time to get acquainted! FBAR was created as part of the IRS’ crackdown on tax evaders. By requiring US citizens to report the balances of their foreign accounts, the IRS can identify those who may be hiding money overseas in order to avoid US taxes. FBAR must be filed if you have $10,000 or more in a foreign bank account at any point during the tax year. Even if you only hit that balance one day in the year, FBAR must be filed. Keep in mind this is an aggregate amount—meaning, if you have a combined total of $10,000 in more than one account, you must file.
In past years FBAR was filed via Form TD 90-22.1 and it had to be mailed to the IRS. Filing is now done electronically via FinCEN Form 114 (which goes to the US Treasury, not the IRS) and there are no extensions. Penalties for failing to file FBAR can be steep, so it is important to file if you are required to do so.
FATCA, the Foreign Account Tax Compliance Act, is yet another reporting requirement developed by the IRS to lure tax evaders out of hiding. With FATCA, you are required to file Form 8938 along with your US Federal Tax Return if you have offshore assets that exceed certain thresholds, which vary depending on your filing status. The types of assets that must be reported are foreign pensions, foreign bank accounts, foreign mutual funds or stockholdings or foreign partnership interests. You are not required to report your home on Form 8938. Here are the thresholds for your filing requirements as a US expat:
If you file for an extension on your US tax return, you are granted an extension on Form 8938, as well.
US expats are often worried about the dreaded dual-taxation, where you pay taxes to your host country and then again to the US. Thankfully there are several ways you can offset your tax liability.
The Foreign Earned Income Exclusion- This exclusion allows you to deduct $97,600 of your foreign income from your US tax return (for the 2013 tax year). It’s possible to eliminate your entire tax liability with this exclusion alone! However, in order to be eligible you must qualify as a US expat by passing one of two residency tests. The Physical Presence test requires you to earn foreign income and be outside of the US for 330 of any 365 day period. (Most expats qualify this way—more details can be found here.) The Bona Fide Residence test requires you to live outside the US for at least one year and have no plans to return to the US.
Foreign Tax Credit – This is a dollar-for-dollar tax reduction on the taxes you pay to your host country. So if you paid $2,000 to your host country, you can deduct $2,000 from your US tax liability. The only catch is that you can’t apply the credit to income you have already reduced using the Foreign Earned Income Exclusion—you can’t get a ‘double-benefit’ by using both deductions on the same income.
Foreign Housing Exclusion- This exclusion allows you to deduct a certain amount of housing expenses, as the IRS recognizes that living abroad can be more expensive. The amount you can deduct is tied to the Foreign Earned Income Exclusion (which adjusts each year for inflation) and certain cities receive higher allowances for their increased cost of living. To find out if your host city qualifies for a higher allowance, see the IRS publication right here.
Obamacare, or the Affordable Care Act, went into effect in 2014 and while it may be surprising, you may still be required to comply with the provisions while living overseas. Here’s the scoop: Obamacare requires all Americans to hold the ‘minimum essential coverage’ as outlined by the plan or a penalty tax will be assessed. If you qualify for the Foreign Earned Income Exclusion via one of the residency tests above, you are exempt from Obamacare. Also, expats covered under a qualifying US expatriate health plan are exempt. If, however, you are overseas on a short-term assignment or don’t yet qualify as an expat, you may be subjected to the tax which is he GREATER of $95 per adult and $47.50 per child (up to $285 for the family) OR 1% of your family for 2014. The penalties rise in 2015 and 2016 but if you are still overseas then, you will like qualify for the Foreign Earned Income Exclusion and be exempt.
As you can see, there is much to learn about US expat taxes! The US tax system is complex and the laws are ever-changing. Staying informed will help you save money on your US expat tax return and avoid costly (and unnecessary) penalties!
This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat tax returns for Americans living abroad. Greenback offers straightforward pricing, a hassle-free process and CPAs and IRS Enrolled Agents who have extensive experience in the field of expat tax preparation. For a more in-depth look at your US expat tax obligations, download one of our free US tax guides right here!
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