Income Tax 10 Things You Should Know About as a US Expat

After you leave the US, expat taxes can seem overwhelming - the guide below should help as a start.

1 - Filing US tax returns

If you are a US citizen or Green Card holder, you still need to file a US tax return each calendar year, reporting your worldwide income.

2 - Foreign tax credits

If you do have foreign income, you will disclose that on the US tax return, form 1040, but you can claim the foreign tax credit on form 1116 to reduce the US tax due.

3 - Foreign earned income exclusion

If you are tax resident overseas, you may also be able to claim the foreign earned income exclusion on form 2555. This excludes over $100,000 of foreign salaries and self employed income from US taxes.

You do need to still file the US tax return to claim the foreign earned income exclusion (FEIE).

There are two main routes to claiming the exclusion -

(i) the bona fide residence test - based on being tax resident outside of the US

(ii) the physical presence test - based on being outside the the US for 330 days or more in a consecutive 12 month period.

4 - Foreign bank account reporting

As a US citizen if you hold bank accounts and other foreign financial accounts, including pensions, outside of the US, you need to make a separate report each year.

The foreign bank account report (FBAR) is filed online each tax year - due by April 15, if you are late there is an automatic extension to October 15.

The reporting threshold is $10,000 - you look at the maximum balance (at any time during the year) on each bank and financial account outside of the US, add up those balances and if they are $10,000 or more then you need file an FBAR.

5 - Stopping double taxation

As you will be reporting taxes in the US and the country you are living in, you may be worried about double taxation.

If you use the foreign tax credit and foreign earned income exclusion, that should stop you being taxed twice.

You have a third option, to use the US tax treaty with the country you are living in. You can use the tax treaty by filing form 8833 to explain the treaty based return position. The form is filed with your federal tax return each year.

You will look at the tax treaty and quote the part that applies to your tax situation and why the tax is being reduced.

6 - Setting up a foreign business as a US citizen

When you set up overseas, you may want to start your own business and set up a foreign company.

If you do set up a foreign corporation, you will need to report that company back to the IRS on form 5471 each year. The disclosure is filed with your federal tax return.

7 - Reporting foreign accounts in your form 1040

In addition to the FBAR, you may also need to report foreign financial accounts in your federal tax return by filing form 8938.

If you are living outside the US, you need to file if the value of your foreign assets are:

Single - more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

Married filing jointly - more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

8 - Catching up with tax returns

Many US expats move overseas and don't realize they still need to file US tax returns.

If you are in that group, the IRS has an amnesty that will help you catch up without penalties.

The streamlined foreign offshore procedure has 3 parts:

file the last 3 tax returns

complete form 14653 to explain why you have not been filing and that you are eligible to use the Streamlined foreign compliance procedures

file the last 6 years of FBAR online with the US Treasury

9 - Dual resident taxpayers

If you are tax resident in two countries, then you look at where the work is performed to see which country has the primary taxing right.

Even if you get paid in country X, if you perform the work in country Y, then Y has the right to tax you first.

10 - Foreign entity

If you set up a foreign entity, apart from the company mentioned above, such as a partnership, you will need to report that entity back to the US each year.

For a foreign partnership, you will use form 8865 and file this with your US tax return.

More help

Hopefully this tax guide will help understand some of the key tax allowances as a US expat - if you do need more help, the IRS has publication 54 which gives more advice and examples.