US Federal Tax Liability: Expat Tax USA

When moving overseas, one of the biggest questions many have concerns Expat Tax. Unfortunately, America is one of a handful of countries that vigorously pursues taxes worldwide – so don’t expect to avoid a U.S. tax debt by moving overseas. As a matter of fact, you’re not even allowed to give up your U.S. citizenship to eliminate a tax obligation.

Be aware that America has tax treaties with over 42 countries where the IRS and the foreign tax agencies exchange tax data on their residents. Many Americans think because they’re earning money in another country – and paying that country’s taxes – they have no liability when it comes to their home country and that they are not required to pay expat tax USA. That’s totally not the case. You still should file a return with the U.S. every year, whether you have income or not. You are not legally required to do so if you don’t owe U.S. taxes, but it’s an important preventative measure as there is a Statute of Limitations on tax disputes. If there is a dispute over back taxes, you start running out the clock on the Statute of Limitations if you file. If you don’t, the IRS can conduct a personal audit at any time in the future and you’ll be liable if they decide against you.

The IRS provides a tax guide for citizens living abroad, this can be found here. There are also some basic facts you need to know about taxation in 2012.

Expat Tax USA: Exclusions

Earnings thresholds

The latest threshold for tax-free earnings for US citizens is $95,100 of foreign earned income for the 2011/2012 tax year. 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. This exclusion is only applicable if you file your tax return.

Housing limits

In addition to earnings exclusions, some expatriates may be eligible for tax breaks based upon their housing costs. It is possible for US citizens to exclude a portion of the money they spend on rental or property costs. 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 $15,216 for 2011/2012. 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 ($28,530 for 2011/2012). Please note that there are numerous exceptions (cities with higher limits). These exceptions can found in IRS Notice 2011-8.

Claiming Exclusions

You need to claim these exclusions on your Form 1040 for that year – they are not automatic – and the exclusions only apply to earned income, not rental income, interest or dividends or any income that’s not a result of your work efforts. You will need to fill out and attach IRS Form 2555 (which you can access here) to your 1040 to take advantage of these exclusions – the instructions at are very helpful in this regard. The form will also help you to determine what you do and do not qualify for in terms of being eligible for the exclusions. Year-to-year, Form 2555 will also provide what the latest caps on what those exclusions are.

Calculating your Tax Payments

Any income that is over and above the exclusion amount, after housing allowances have been applied, will be taxed. The tax rates and breaks for 2011/2012 are as follows:

Tax Rate Married Couple Filing Jointly Single Filer
10% Not exceeding $17,400 Not exceeding $8,700
15% $17,400 – $70,700 $8,700 – $35,350
25% $70,700 – $142,700 $35,350 – $85650
28% $142,700 – $217,450 $85,650 – $178,650
33% $217,450 – $388,350 $178,650 – $388,350
35% Over $388,350 Over $388,350

Self-Employment Tax

Another important aspect to be aware of when it comes to Federal taxes is the U.S Self-Employment Tax. If you’re an employee of a foreign company (which could, in fact, be your own foreign corporation) and have payroll taxes from that country taken out of your pay, you don’t have to also pay social security taxes to the U.S. If you are self-employed, however, acting as an independent contractor, then you must file a Schedule C with your U.S. Tax return and pay the appropriate U.S. payroll taxes on your net earnings. The self-employment tax rate is 15.3% and the foreign income exclusion mentioned before does not reduce this liability.

If you do have your own foreign corporation, or have more than a 10% interest in one, you must file a special form, Form 5471, reporting that ownership stake. If that foreign corporation is making profits, you may owe taxes on its earnings. Find out more about the form at Basically foreign income from any source must be reported to the IRS, including trusts, capital gains, royalties, etc.

If you are still living abroad as of April 15th of any year, the IRS grants you an automatic extension until June 15 to file your return for the previous calendar year. You can, as you could in America, file more extensions to push your filing date forward all the way to October 15th – just know that, just like if you were still living in America, you are still liable to interest and penalties if you haven’t paid all your estimated taxes by the original April 15th deadline. These extensions are completely necessary if the country you’re living in has a different financial year. New Zealand, for example, closes out its financial year on April 30th instead of December 31st, which means you won’t have your final tax information until after the initial U.S. filing deadline of April 15th!

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