US Expat Tax FAQ’s
Getting there.
Do I have to file a US income tax return if I live and/or work overseas?
if you meet minimum income thresholds for filing US income tax return, yes, you will need to file a US federal income tax return. US citizens and Green Card holders are subject to income tax on their WORLDWIDE income. So regardless of where you earn your income, the minimum threshold applies to your total aggregate worldwide income.
Do I have to file a State Income tax return if I live overseas?
The answer depends on what state you were resident before moving overseas. Some states have strict domicile rules that make it difficult to claim you are no longer a resident. These rules don’t take into account where you are actually living, the rules take into account things like, property owned in the state, voter registration, vehicles owned, maintaining mailing addresses, etc. Other states base your requirement to file on a physical presence test.
Do I have to file a US income tax return if I’m retired and living overseas?
If you meet the minimum income thresholds for filing a US tax return, yes, you will need to file a US income tax return.
Can I receive US social security payments overseas and is the income taxable in the US?
Yes, in many countries you can receive social security payments directly into your foreign bank account. All of your worldwide income is subject to US federal income tax.
What income do I need to report on my US federal income tax return if I live or work overseas?
You need to report ALL income received overseas and in the US. Reportable income received overseas includes the same type of income that is reportable if you had received in the US.
Are there any relief provisions, deductions or credits available on my US tax return?
Yes, there are several relief provisions available specifically to expats that can reduce their tax liability. There are two Income Exclusion benefits: the Foreign Earned Income Exclusion (up to $120,000 in 2023) and the Foreign Housing Exclusion. There is also a Foreign Tax Credit available if you have paid foreign income taxes. This is a dollar-for-dollar reduction in your tax liability.
What are the income thresholds for filing a US income tax return?
Most taxpayers are going to be obligated to file a US federal income tax return. There are various income thresholds but there are also special situations that require you to file a return. For the tax year 2022, the income thresholds are dependent on your filing status, age(s), if you are filing as child or dependent and if you lived in US territory. For more common situations; Single filers (under age 65) with gross income of at least $12,550 (over age 65) is $14,250. Married Filing Jointly both spouses under age 65 with gross income of at least $25,100 increasing to $27,800 for MFJ both spouses age 65 or older. However, if you had earnings from self-employment of at least $400 you are required to file a return. It is highly recommended that you discuss your individual situation with a tax professional prior to making a conclusion regarding your compliance obligations for both state and federal income tax obligations while living and working overseas.
Is it true that I will owe zero US taxes if I work overseas?
Not necessarily. Your tax liability will depend on a variety of factors including but not limited to: income, qualification for the Foreign Earned Income Exclusion, the applicability of the Foreign Housing Exclusion, and your eligibility to claim the Foreign Tax Credit for any foreign income taxes you paid. You might also be subject to Social Security and Medicare tax contributions.
Are there other filing requirements that expats who are working overseas are obligated?
Expats are subject to additional reporting requirements that carry heavy penalties for delinquent filings. Some of these additional reporting requirements include FATCA reporting of Specified Foreign Financial Assets on Form 8938, Form 5471 – Reporting of ownership in controlled foreign corporations, Form 3520 and 3520A – Reporting of transactions with and ownership in foreign trusts; Form 8621 – reporting of ownership in Passive Foreign Investment Companies includes ownership in foreign mutual funds; and FBAR – Foreign Bank Account Reporting which requires reporting of aggregate balances in foreign financial assets greater than $ 10,000.
Do I have to pay Social Security and Medicare taxes if I work overseas?
Yes. Generally, you will have to pay into the US Social Security/Medicare program through your US affiliated employer or through self-employment tax unless you pay into a foreign national Social tax program and have a Certificate of Coverage claiming exemption from US Social Security obligation under a Totalization Agreement. The exemption claim is to help prevent a taxpayer from paying into more than one Social program. Currently, there are only 30 countries with which the US has Totalization Agreements.
Do I have to report rental income on my US federal income tax return?
Yes, but you may also take deductions from your rental for legitimate and necessary business expenses incurred to manage and maintain the rented property. Thus, you pay tax only on the net income from the property.
How do I qualify for income exclusions or credits?
Qualification for the Foreign Earned Income Exclusion is dependent on meeting the Bona Fide Residence Test or the Physical Presence Test. Qualification for the Foreign Tax Credit is dependent on payment of foreign income tax. The amount of the credit is limited to the amount of your US income tax liability. Any excess foreign income taxes paid above the credit taken can be carried back one year and forward 10 years.
How does the Foreign Earned Income Exclusion work?
The FEI exclusion for tax year 2023 is $120,000. Therefore, a taxpayer who qualifies under the Bona Fide Residence or Physical Presence tests can exempt from taxable income up to $120,000 of foreign earned income. Note, this exemption applies only to foreign earned income and does not apply to income sourced in the US.
What is the Foreign Tax Credit and do I qualify?
The Foreign Tax Credit (FTC) is a dollar-for-dollar reduction your US taxes owed for the USD equivalent amount of foreign income taxes paid. This FTC is available to all US taxpayers, not just expats, but is used extensively by US expats to reduce or eliminate their US tax liabilities. Any excess amount for Foreign tax paid above the credit taken in current year has a carry-back and carry-forward provision.
What is the Foreign Housing Exclusion and do I qualify?
If you meet the Bona Fide Resident and or the Physical Presence Test, you might qualify to take a deduction for certain foreign housing expenses incurred. The calculation is limited depending on where you live and is only available to the extent that you have foreign income that exceeds the amount of Foreign Earned Income exclusion claimed.
Does the Foreign Earned Income Exclusion affect my tax liability on my US sourced income?
No. Tax on your US sourced income cannot be offset by the Foreign Earned Income Exclusion. In fact, the marginal tax rates that apply to your US sourced income are the same as if you did not claim the FEI exclusion of foreign income.
Can I contribute to an IRA if I work overseas and earn foreign sourced income?
It depends. You cannot contribute amounts to an IRA unless you have income that exceeds the amount of Foreign Earned Income Exclusion you claimed on your return. If you have claimed all your foreign earned income as FEI exclusion and you make a contribution to an IRA, you will have made an excess contribution that will need to be withdrawn. You can contribute amounts up to the annual limit for income not claimed under the Foreign Earned Income Exclusion.