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US Citizens Living Abroad And Taxes – A Quick Expat Tax Guide

Updated: May 16, 2022

There are some common misunderstandings about U.S. Tax and Americans living abroad. In this article, we will discuss a few of them.

Do US citizens living abroad have to file US taxes?

Yes. If you are a U.S. citizen or resident alien living abroad, you are subject to tax on your worldwide income similar to those in the states.

If you earned more than the threshold amount for your filing status and your age (in 2019, the amount is $12,200 if your filing status is single and under 65 years old) or more than $400 of self-employment income, then you are required to file a U.S. income tax return Form 1040, whether or not you live abroad.

If you are required to file, then your worldwide income is subject to U.S. income tax, regardless of where you reside.

A state income tax return may be required based on your state residency status and/or your state source income.

If you are a nonresident alien, you are usually subject to U.S. income tax only on U.S. source income.

I make under the maximum foreign earned income exclusion amount, do I still need to file?

Yes. The foreign earned income exclusion, Form 2555, is an election and if you do not file, then it doesn't apply. Therefore, you have to submit a tax return form 1040 and attach form 2555, in order to exclude your income to lower or completely eliminate your tax liability.

"If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside." The Internal Revenue Service

The tax treaties prevent double taxation. If I am paying higher tax rates in a foreign country, Do I still need to file?

Yes. In order to benefit from the tax treaty the US has with a foreign country, you must fill out and submit a US tax return, form 1040. Attach to your tax return form 1116 to claim a credit for foreign taxes paid against your U.S. tax liability.

The U.S. tax treaties with over 65 countries do not prevent the majority of US citizens living abroad from having to file US taxes unless exceptions apply. Students, teachers, and Americans working in research and development may be exempted from filing or paying US taxes. However, this exception depends on the treaty.

The totalization agreements the United States has with 30 countries (as of September 15, 2019) may prevent the double taxation. According to the United States Social Security Administration, the "International Social Security agreements, often called "Totalization agreements," have two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country."

Will I be Subject to Double Taxation?

Certain Americans living abroad required to file a US tax return may be subject to double taxation due to many reasons. If there is no income tax treaty or totalization agreement between the U.S. and a foreign country that imposes income and social taxes on worldwide income to its residents for tax purposes, then double taxation may occur.

How to avoid double taxation? The most common IRS tax provisions are the IRC section 901 and the IRC section 911.

Under section 911, you may exclude up to your first $105,900 on your 2019 tax return (inflation-adjusted annually) of your foreign earned income from your US income by filing form 2555.

Under Section 901, you may take a U.S. tax credit for foreign tax paid or accrued against your U.S. liability on form 1116.

You must, however, file a US tax return and attach one or both forms to alleviate double taxation.

Under certain circumstances, you may enjoy zero tax income liability if you are employed in and you are a bona fide resident in one of the few countries that do not levy an income tax.

Additional Filing Requirements

Although not an income tax, FBAR Form Fincen 114 and FATCA Form 8938 are two additional foreign financial assets reports that Americans living abroad must be aware of. Steep penalties may be imposed for failure to file these disclosure requirements should you meet the minimum filing threshold amounts and should you not submit the required forms on time.

You generally must complete and electronically submit your FBAR form Fincen 114 by April 15 (automatically extended to October 15 without the need to file an extension) should you have an interest in or signature authority over foreign financial assets with an aggregate balance of $10,000 USD or more during the year.

U.S. citizens expats may be required to file FATCA Form 8938 to report their foreign financial assets with a total value over a certain threshold. This form is attached to the annual individual income tax return, form 1040. Per the IRS, Taxpayers with a total value of specified foreign financial assets below a certain threshold do not have to file Form 8938

What if Americans living abroad do not file their tax return or financial information?

Let me say this first as quite a bit of people are affected. Even if you are born outside of the United States and you do not have a US passport or a US social security number, you may still be subject to the U.S. income tax and financial assets compliance obligations, if a least one of your parents is a U.S. citizen. This remains true unless you relinquish your U.S. citizenship.

There is no statute of limitations for the tax years a return is not submitted. Therefore, if you get audited by the IRS, you may be subject to penalties and interest, if applicable

If you do not meet your obligation to file your required tax returns, FBARs, FATCA form 8938, or other foreign informational returns, then you may be subject to steep penalties. We have listed on the FAQs page of Whin Global a summary of the penalties per form and per disclosure requirements.

When does a Revocation or Denial of Passport in Case of Certain Unpaid Taxes occurs?

If you have seriously delinquent tax debt, IRC § 7345 authorizes the IRS to certify that debt to the State Department for action. The State Department generally will not issue a passport to you after receiving certification from the IRS.

What is Seriously delinquent tax debt?

Seriously delinquent tax debt is an individual's unpaid, legally enforceable federal tax debt totaling more than $52,000 (for 2019 including interest and penalties, indexed yearly for inflation) for which a:

  • Notice of federal tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted or

  • Levy has been issued.

Seriously delinquent tax debt is limited to liabilities incurred under Title 26 of the United States Code and does not include debts collected by the IRS such as the FBAR Penalty and Child Support

Fortunately for American Expats, the Streamlined Foreign Offshore Procedures enable US taxpayers to catch up with their income tax and FBAR filings. According to the IRS, late filing and late payment penalties will not be assessed under the streamlined procedures. The streamlined procedures help US citizens living abroad who want to renounce their U.S. citizenship.

How do I get help?

One of the best strategies is to seek tax advice from a qualified expat tax professional if you have tax questions about your US income taxes or foreign financial reporting obligations. Generally, you save more than what it cost you to get your tax questions answered professionally.

CPAs at Whin Global are ready to assist. If you need assistance or just have a tax question, contact us.

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