The intention of this article is to provide an overview of the tax rules and regulations regarding United States citizens, residents, and Green Card holders who live and work (or earn other types of income) in a foreign country. This article is intended to increase the awareness of US expatriates’ tax liability only and should only be used as a source of US expatriate tax information rather than a guide for filing US expat taxes.
All citizens, residents and Green Card holders of the United States are required to report all worldwide income (unless they’ve earned less than the US tax filing thresholds) whether they live and work in the United States, a US territory, or any foreign country. Additionally, US expatriates living and working abroad are bound to the same rules of IRS taxation which are applied to US citizens, residents, and Green Card holders living and working in the United States. There are, however, additional courtesies extended to US expats to minimize the financial impact of being assessed taxes in more than one country.
If you meet one of the 2 overseas residency requirements established by the IRS (either the Physical Presence Test or the Bona Fide Residence Test) you will be allowed to exclude some or all of your foreign earned income from your total income which is taxable by the IRS by claiming the Foreign Earned Income Exclusion (FEIE). The maximum amount for the FEIE in 2011 is $92,900, and if you made less than this amount overseas you will be able to deduct your entire income from US taxation. There is also another credit available to you known as the Foreign Housing Credit. The details of this credit will be outlined later, but it’s important for you to know that this credit is claimed on the same form as the FEIE, Form 2555. If you are only claiming the FEIE you may only be required to submit Form 2555-EZ.
In addition to the aforementioned credits available to you as a United States expatriate, there are additional tax credits which can be claimed against foreign taxes you’ve had to pay on income exceeding the amount claimed in the FEIE. The United States also has a wide variety of active tax treaties with other countries through which your foreign tax liability may be reduced.
US Expat Tax Filing Requirements
As indicated earlier, the filing requirements for US citizens and Green Card holders living and working in a foreign country are typically identical to those living and working within the United States.
Who is required to file a US tax return? Generally speaking, your requirement to file is determined by your age, gross income amount, the source of your income, filing status, and whether or not anybody else can claim you as a dependent. A single individual, for example, who is below the age of 65, earned income from an employer (NOT self-employment) totaling less than $9,500, and doesn’t own any foreign accounts may not be required to file. The filing threshold for a single dependent in the same situation, however, is required to file a US tax return if he/she had an earned income of more than $5,800. There are many more filing thresholds and situations for which a US tax return is required, and they can be found in the IRS Publication 501 in Table 1, Table 2, and Table 3.
The determination of your requirement to submit a US expat tax return should include all the income you receive whether it’s from a foreign country or from the United States – even income which:
- Is paid in foreign currency
- Has been taxed by your host country
- Is deductible by claiming the Foreign Earned Income Exclusion on Form 2555
US Expat Tax Return Filing Deadlines
For US citizens, residents, and Green Card holders who live and work in the United States the deadline for filing US income taxes for the previous year is April 15th. US expats living and working abroad when this date passes are only required to pay any taxes owed to the IRS by this date. You may acquire assistance from a US expat tax professional to help determine the estimated amount of your tax liability. If you do not make an estimated tax payment by April 15th, you will most likely be subject to interest and penalties by the time you file your US expat taxes and make a payment.
While you are required to remit payment for any tax liability you owe to the IRS by April 15th, you will qualify for an automatic filing extension to June 15th. This extension is automatic and doesn’t require a formal request; however, many US expats choose to file Form 4868 to avoid confusion. Whether or not you file Form 4868, be sure to attach a statement to Form 1040 outlining your eligibility for the extension. To qualify for the automatic filing extension one of the following situations must apply:
- You were living in a country outside of the United States or Puerto Rico
- Your primary place of work was outside of the United States or Puerto Rico
- You were a member of the US Military who was stationed in a foreign country outside of the United States or Puerto Rico
There are situations with a number of US expats which make it impossible to file by June 15th. Some want to wait in order to qualify for the Physical Presence Test or Bona Fide Residence Test, and others may have difficulty acquiring all the forms necessary to file a complete and accurate return. If you need more time to file your US expat tax return you may make a formal request to the IRS by filling out and submitting Form 2530 to the IRS Center in Philadelphia or by contacting an IRS representative in your host country. If you are planning on requesting an additional extension, you must submit Form 2530 after the tax year has come to an end and before June 15th. If you qualify for an additional extension you will either be given a maximum filing date of October 15th or you will be given a personal filing deadline coinciding with the date on which you meet the qualifications for claiming either the Physical Presence Test or the Bona Fide Residence Test.
Where to Send US Expat Tax Returns
Most US expats should submit their US expat tax return to the Internal Revenue Service Center in Austin, TX which is the designated receiving office for US expatriates. Your return should be mailed to this address, particularly if any of the following statements apply:
- You qualify for and are claiming the Foreign Earned Income Exclusion
- You qualify for and are claiming the Foreign Housing Credit
- You qualify for and are claiming the income exclusion available to bona fide residents of American Samoa
- You reside in a foreign country or US territory and are without a legal residence or primary place of work within the United States
If none of the preceding statements apply to you, refer to Publication 54 or check the Form 1040 instructions for the best address to send your US expat tax return.
Type of Income Eligible for the Foreign Earned Income Exclusion
Only income earned from a foreign country is eligible to be claimed on Form 2555. If you lived in a foreign country but earned income from a source in the United States such as US Military or a US Government agency, this income is not considered foreign income and is completely subject to taxation by the United States Internal Revenue Service.
Limit of Credits and Deductions Available on Foreign Earned Income
Aside from the Foreign Earned Income Exclusion, the IRS offers a variety of credits and deductions to further eliminate double taxation. It’s important to understand that any income claimed on Form 2555 IS NOT eligible for additional credits or deductions. Claiming the Foreign Earned Income Exclusion also disqualifies US expats from claiming the Earned Income Credit. Furthermore, claiming the Foreign Earned Income Exclusion will affect the manner in which your qualifying IRA contributions are calculated if you are on a foreign employer’s plan; all income which has been excluded on Form 2555 will be used to determine your AGI (adjusted gross income).
Choosing Your Deductions
You are free to make the choice to either claim the Foreign Earned Income Exclusion, the Foreign Housing Credit, or both. If you decide to claim both deductions available to you it will be mandatory that you figure the Foreign Housing Credit amount before figuring the Foreign Earned Income Exclusion amount. Once you’ve calculated your deduction amount for the Foreign Housing Credit, your allowable Foreign Earned Income Exclusion amount is determined by either your maximum annual FEIE limit or the amount of your foreign earned income which was not claimed in the Foreign Housing Credit – whichever is lower.
If you elect to only claim one of these 2 deductions you will be required to claim only that deduction for the current tax year and all future years until which time you revoke your decision. A revocation can be made during any tax year, but it’s vital that you understand the consequences of such a revocation: If you revoke your right to claim either deduction, you forfeit the right to claim that deduction for the subsequent 5 years. You may, however, be able to change your revocation status within that 5 year period with approval by the IRS. To learn more about revoking your right to claim either deduction, refer to Publication 54, Chapter 4.
US Expats with a Spouse
If you are married and you and your spouse both qualify for either deduction, there are a variety of circumstances which may apply. To find out the process of claiming either or both deductions in your situation, you can also refer to Publication 54, Chapter 4.
Foreign Tax Credit
More often than not, US expats living and working in a foreign country will be subject to taxation on income by their host country. If you are responsible for paying taxes in a foreign country, you may be able to either claim the amount of foreign taxes paid as a credit or deduct the amount of foreign taxes you paid from your total income taxable by the United States IRS on your US expat tax return. In most cases, it is better to claim the foreign taxes you paid as a credit rather than a deduction. The reason for this is that – while both the credit and the deduction reduces your US tax liability – only excess portions of the credit may be carried over and applied to other years; a deduction is only used to reduce your taxable income and can only be claimed in the current tax year. If you decide to claim a credit on some of your foreign taxes, you will be required to claim all your foreign taxes the same way. You are typically not allowed to claim some foreign income taxes as a credit and others as a deduction.
If you elect to claim a credit against your foreign income taxes you will be required to fill out and submit Form 1116 along with Form 1040. If you include foreign taxes on the line designated for withheld taxes on Form 1040, you cannot claim an additional credit on Form 1116. If you choose to claim foreign taxes as a deduction, include the amount in your itemized deductions on Schedule A and submit it with Form 1040.
The more complicated your overseas situation is the more complex your US expat tax return becomes. If you are confused about filing requirements, available deductions or credits, withholding and taxation guidelines, or any other aspect of United States expatriate taxes – help is available. Don’t let your confusion lead to misfiled taxes, unclaimed credits, or a decision to simply not file; contact a US expat tax expert today to make sure you stay compliant with United States taxation laws.
The article is merely an overview of an overwhelming amount of US expat tax information. It was written by I.J. Zemelman, EA. Tax Operations Director at Taxes for Expats. She has been helping US expats stay on the good side of the IRS for over 20 years.