Living and working abroad can be an exciting and enriching experience, but it also comes with certain responsibilities, one of which is filing your U.S. taxes. Many U.S. citizens and green card holders don't realize that they are still required to report their worldwide income to the Internal Revenue Service (IRS) even when they reside outside the United States. In this blog post, we will walk you through the essential steps and considerations for filing taxes while living abroad.
Key Tax Deadlines
It is important to know the tax deadlines to make sure you file your returns and pay off your taxes in time.
The traditional tax filing deadline for U.S. citizens and green card holders.
The extended deadline for taxpayers living abroad. You don't need to file for an extension to take advantage of this date.
Extension deadline if you need additional time to file your return. This only applies to filing your return, not paying taxes owed.
Tax Residency: Determining Your Tax Filing Status
The IRS uses the term resident alien to refer to people who are not citizens of the United States but meet the criteria for U.S. taxes. It is crucial to first determine your tax filing status before diving into specifics. The majority of American expatriates fall under one of two categories:
A. U.S. Citizen or Resident Alien Abroad: If you are a U.S. citizen or resident alien living abroad, you are generally considered a U.S. tax resident and are therefore required to file U.S. income tax returns, just as if you were living in the United States.
B. Non-Resident Alien: If you are not a US citizen or resident alien, but you earn income from US sources, you may still have tax obligations. Non-resident aliens typically file Form 1040NR or 1040NR-EZ.
Taking Advantage of Tax Benefits
Foreign Earned Income Exclusion (FEIE):
This benefit allows you to exclude a certain amount of your foreign-earned income from your US tax return.
For 2023, the maximum amount an individual person could exclude is 120,000.
To claim the FEIE, you must meet specific requirements, such as having a tax home in a foreign country, and you must meet either the Physical Presence Test or the Bona Fide Residence Test, which assesses your time spent abroad.
If two individuals are married, both work abroad, and they individually meet either the bona fide residence or physical presence test, then they can each file for FEIE, which would allow them to exclude 240,000 altogether.
Foreign Tax Credit (FTC):
If you pay taxes to a foreign country on the same income that the U.S. is taxing, you can often claim a credit for those foreign taxes.
The FTC reduces your tax liabilities based on the amount of tax that you pay to your foreign country.
This helps prevent double taxation on your income; therefore, it is essential to keep thorough records of your foreign taxes paid, as you'll need to report them accurately on your U.S. tax return.
Foreign Housing Exclusion/Deduction:
If you live in a foreign country and incur significant housing expenses, you may be eligible for additional tax benefits under the Foreign Housing Exclusion or Deduction.
Be Aware of Additional Reporting Requirements
U.S. citizens and residents with financial accounts in foreign countries may also have additional reporting requirements.
FBAR: If you have foreign financial accounts with a total value exceeding $10,000 at any point during the year, you must file an FBAR separately from your tax return.
FATCA Reporting: The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report accounts held by U.S. taxpayers to the IRS. Ensure your foreign bank is compliant and report your foreign accounts as required. Make sure your foreign bank is able to report your foreign accounts so you do not receive any penalties.
Failing to meet these reporting obligations can
result in penalties, so it's essential to stay informed.
Many people who live abroad find it beneficial to work with tax professionals who specialize in international tax matters. They can help you navigate the complexities, ensure compliance, and maximize your tax benefits.
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