Below is an article about US income tax issues for Americans living abroad. It is an important issue that many of us are not only concerned about but have to deal with regularly. This article was supplied by TaxesForExpats, an outfit that has a good reputation from all we’ve seen and heard. We have agreed to refer people to them as an affiliate in order to help you. Please give us your opinion and/or experiences about them and this subject — use our contact form to send us any feedback on this, or put your comments at the bottom of this page
Considering Living and Working in a Foreign Country as a US Expat?
By I.J. Zemelman, EA, Taxes for Expats
In the current state of the US economy, more and more individuals are seeking opportunities in other countries which simply are not available in the United States. International commerce has spawned great development in a wide variety of foreign countries in which numerous jobs are available and real estate is still considered a good investment. If you’re among the populace of US Citizens and Green Card holders who are considering a new life overseas, it’s imperative that you educate yourself on your US tax obligations that will follow you overseas.
Keep in mind that this article is not intended to scare you; rather, increase your awareness on your responsibilities as a US Citizen or Green Card holder living and working in a foreign country. Most US expats have no reason to be nervous about having to file US income taxes – except for the confusion of filing itself. The reality is that the majority of US expats wind up having no tax liability what-so-ever in the United States after taking advantage of the tax breaks available to them. Those who do wind up owing the IRS generally owe very little – that is, if they have remained compliant each year with US expat tax filing requirements. In cases with multiple years of unfiled returns, balances tend to increase drastically after interest and penalties have been applied.
If you have been living overseas for a number of years and were unaware of your requirement to file US expat taxes or have decided not to file for whatever reason, contact a US expat tax expert right away to help you make arrangements with the IRS to file back taxes and negotiate away a portion of your penalties. If the IRS has already contacted you with a report of how much you owe for unfiled years, it’s important to realize that they calculated that amount without granting you ANY of the extra deductions or credits made available to you. If you file back taxes, it’s likely you will not owe anything and they will replace their substitute returns with your filed returns, thus ending your non-compliance and eliminating your debt to the IRS completely.
US Expat Tax Obligations
US Citizens and Green Card holders – whether living and working in the US or in a foreign country – are required to file an annual US tax return if they earn more than $9,500 (different thresholds may apply depending on your filing status, age, and other factors) in a taxable year. If a US expat earns more than $1,500 from foreign accounts or has a total foreign account balance (all accounts combined together) of $10K or more, he/she will not only have to report the income to the IRS, but also report the account information to the Department of Treasury on Form TD F 90-22.1.
Available Credits, Deductions, and Exclusions to US Expats
The act of the United States imposing taxes on its citizens around the globe is admittedly not a popular practice, but when you consider the numerous tax benefits extended to you by the IRS it becomes an easier pill to swallow. The most impressive tax saving provisions offered to US expats by the IRS are:
The Foreign Earned Income Exclusion (FEIE) allows you to claim up to $92,900 (the amount for 2011; it is adjusted annually based on inflation) from your income which is taxable by the United States. The Foreign Housing Deduction allows you to deduct qualifying housing expenses from your US taxable income. Depending on the country in which you live the allowance for the Foreign Housing Deduction may be very high (over $200 a day). You can only claim the Foreign Housing Credit for the days which qualify you for the tests outlined below. If you only lived in your host country for a portion of the tax year, you must calculate the exact number of days you were there to determine your eligibility amount.
Both the Foreign Earned Income Exclusion and the Foreign Housing Deduction are claimed on Form 2555. If you have no intention of claiming the Foreign Housing Deduction, you may file Form 2555-EZ. In order to qualify for one or both of these deductions, you must have earned income from a foreign employer or earned self-employment income from foreign sources, have lived in a qualifying foreign tax home, and meet one of the following 2 tests:
- Physical Presence Test: A US expat meets the Physical Presence Test if he/she has been living in a foreign country for at least 330 days out of the 365 day period counting back from his/her designated US expat tax filing deadline.
- Bona Fide Residence Test: A US expat meets the Bona Fide Residence Test if he/she has been living in a foreign country for an entire 365 day period and intends to stay in said country for an indefinite period of time.
The Foreign Tax Credit allows international taxpayers to take a dollar for dollar credit against their US taxable income on taxes paid to or accrued in a foreign country. The Foreign Tax Credit can only be claimed on income which is not excluded by claiming the FEIE. For example, if you make $120K per year, you claimed the FEIE, and your host country’s rate of taxation is 20%, here’s how you would have to figure out your credit allowance: Subtract $92,900 from $120K ($27,100), then multiply $27,100 by 0.2 ($5,420). If your US tax liability is below $5,420 you will not be able to take the entire credit in the current tax year, but you will be able to carry over the unused portion to the following tax year. If your US tax liability is equal to or greater than $5,420 you will be able to credit the entire amount. The Foreign Tax Credit may be claimed on Form 1116.
US Expat Tax Filing Deadline
US taxes are generally due by April 15, but US expats automatically qualify for a 2 month extension to June 15. Additionally, if you need more time to prepare your taxes, you may request another extension to October 15. These extensions only allow you to file your US expat tax return at a later date; if you owe any taxes your payment must be received by April 15. To estimate taxes, use Form 1040-ES. Failure to make an estimated tax payment to the IRS by April 15 will result in interest being applied to your balance due. Interest is applied daily, and your balance will continue to grow until you satisfy your debt. Mail your estimated payment along with Form 4868 to:
Internal Revenue Service
P.O. Box 660406
Dallas, TX 75266-0406
How to File US Expat Taxes?
As with all taxpayers, US expats have 2 options for filing a tax return: Electronic or traditional paper. Because of the additional information generally required by the IRS for US expat tax returns, many expats choose to file a paper return so nothing is overlooked. If you’re filing a paper US expat tax return, mail Form 1040 and all required forms and documentation to:
Internal Revenue Service Center
Austin, TX 73301-0215
Make sure to double check the address either on www.irs.gov or by referring to the Form 1040 instructions to the year for which you are filing a US expat tax return.
Help With US Expat Taxes
Due to the complex nature of US expat taxes, many expatriates prefer not to file their own return. If you are interested in filing your own US expat tax return and you have a list of questions you need answered, we are available to help understand expat taxes by phone for a consultation fee. If you prefer to have your US expat taxes prepared by a professional, you have a variety of options, and it’s important to consider each carefully.
You can file electronically with a company like Turbo Tax or H&R Block, but these automated tax filing venues generally don’t make you aware of all the options available to you for maximizing your return. You may choose to seek assistance from a CPA or even a local IRS representative. Realize, though, that you will most likely either pay a fee of anywhere between $400 and $1K or be required to pay per form (no telling how expensive that will get).
Another option is to take advantage of the flat US expat tax return preparation fee of $349 at Taxes for Expats and benefit from our vast experience in US expat taxes.
Need help with Indonesian taxes? See this article