US Expat Tax 101

By Trey Atkins, CPA

Do expats have to file a tax return or pay US taxes if they live overseas?

Are you: 

A US citizen? 

Who lives and or works Overseas? 

Are you a digital nomad? 

If you answered yes to any of the above…

First, the BAD NEWS  ☹

“I don’t have to file an income tax return if I live and or work overseas”.  This common belief is…….FALSE !  Living outside the country does not eliminate your obligation to file a tax return. 

US Citizens are taxed on worldwide income.  This means all income, derived from any work or investment, in any country, is subject to US income tax reporting.  Despite what many believe and many of your expat friends might tell you, you are almost certainly obligated to file a US tax return regardless of where you live and where you earn income.

The good news for expats filing their taxes:

Despite being obligated to file a tax return and report foreign income, many individual expat taxpayers owe very little or even zero federal income tax. 

Foreign Earned Income (FEI) Exclusion: 

You might be able to exclude up to $ 120,000 from your income earned overseas, reducing or perhaps eliminating, your taxable income.  If you meet the physical presence or bona fide residence test, you will be allowed to exclude income earned overseas up to $ 120,00 for the 2023 tax year ($112,000 for 2022).   Income earned in the US, cannot be excluded under the FEI exclusion. This exclusion does not apply to passive investment income.

Foreign Housing Exclusion: 

You might be able to exclude certain housing expenses such as rent and utilities. This exclusion comes into play if your income exceeds the FEI exclusion limit.

Foreign Tax Credit: 

Or you might be able to take a dollar-for-dollar tax credit for the amount of income taxes you paid to a foreign government. 

Other News for Expats:

There are several other IRS tax and US Treasury reports that need to be filed if you meet certain criteria.

1. FBAR (FINCEN 114):  If you have $ 10,000 or more at any one point during a calendar year in cumulative foreign bank account balances, you are subject to annual reporting via FBAR reporting requirements under the US Treasury laws.  FBAR reporting requirements apply to any account you have an ownership interest or signature authority.  Penalties are HUGE for failure to report, up to $ 10,000 per violation.  And any determination by the IRS for willful failure to report, the penalty can be $100,000 or 50% of the asset value in the account.    

2. IRS Form 8938 – Statement of Specified Foreign Financial Assets.  This form is filed with your Tax Return to meet FATCA reporting requirements (Foreign Account Tax Compliance Act).  FATCA Form 8938 requirements are dependent on your filing status and residency status. 

3. Form 8621 – Passive Foreign Investment Company (PFIC).  Required filing for shareholders in PFIC’s that might also include most overseas Mutual Funds. 

4. Form 3520 – Report of Transactions with Foreign Trusts & Receipt of Certain Foreign Gifts.

5. Form 5471 – Information Return in respect to US Persons with Certain Controlled Foreign Corporations (CFC).

Self-Employment Tax / Social Security Tax:

If you are self-employed, you will need to pay both US Social Security and Medicare tax in the US, regardless of where your income was earned (US or foreign).  The FEI exclusion does not apply to the calculation of income subject to these taxes.

 Totalization Agreements:

In cases where social security tax is levied in both the US and in the foreign country, the expat might be able to avoid this double taxation through the use of a Totalization Agreement.  The US has signed Totalization Agreements with 30 countries that enable the taxpayer to pay the social tax in only one of the two countries. 

Basic Tax Information for Expats  😉 

 Filing Thresholds:

Obligation to file a US tax return is subject to minimum income levels based on filing status, all of which are above $12,000.  Regardless of filing status, a self-employed individual must file a return for income greater than $400.   

Federal Tax Filing and FBAR reporting Deadlines:

April 15th:  Normal tax reporting deadline for individuals.

April 15th:  Due date for FBAR (FinCen 114) automatic extension to October 15th. 

June 15th:  Tax deadline for individuals living overseas at the time tax returns are due.  This is an automatic 2-month extension from April 15th, but the taxpayer should attach a statement with their return to note they meet such requirements.

October 15th:  Reporting deadline for tax filers who submitted an extension via Form 4868.  Form 4868 should be filed before the June 15th deadline for expats living abroad.

Form 2350: An additional extension for meeting physical presence test or bona fide residence test. This extension is beyond the Oct 15th filing extension, is generally one month beyond the time needed to establish the applicable residency test, has to be specifically granted by IRS. 

State tax return due dates and extensions vary.

Interest & Penalties:

Interest on taxes due starts accruing after the April 15th deadline.  An extension of time to file is not an extension of time to pay.  Interest is computed daily on the outstanding balance of tax and penalties due until the balance is settled in full.  The interest rate is adjusted quarterly by the IRS. 

Penalty for late filing is assessed for returns filed after the accepted tax deadlines.  June 15th for individuals residing overseas, October 15th for valid extensions.

Penalty for failure to pay the tax due by April 15th.  The penalty is 0.5% of the tax due.

State Tax Returns:

I’ve moved overseas, surely I don’t need to file a State income tax return!  This belief might be true, might be false. 

Despite having established a new home residence overseas, you might be obligated to file and pay state income taxes depending on the state you last resided in the US.  Each state has different rules as to the obligation to file a return based on whether the state is considered a residency state or a domicile state.  Some states may still consider you a resident even though you’ve moved abroad.  When filing a state return, some states follow Federal income tax rules (i.e. recognize FEI exemption) and some states do not.  A professional expat tax preparer can help you determine if you have state income tax filing obligations.   

Social Security Benefits:

Social Security benefits can be received in many countries.  In most filings, the individual should file a US tax return and report the SS benefits received. 

Child Tax Credit: 

The Child Tax Credit is available for dependents of US tax filers.  In order to qualify for the credit, the dependent must have a US social security number and must have resided in the US with the taxpayer for a minimum of 6 months during the tax year. 

If you thought you didn’t need to file a tax return because you live overseas, I hope I’ve convinced you you’re wrong.

Haven’t filed? Don’t let this particular sleeping dog lie. Taxpayers who owe more than $ 52,000 to the IRS are at risk for passport revocation and block of passport renewal. Don’t risk you livelihood.

In certain situations you can become compliant with less hassle and less cost with IRS Streamlined Filing.