What Americans Living Abroad Need to Know About Filing Taxes for Expats?
Most taxpayers in the United States are required to file their tax returns with the IRS by April 15. U.S. taxpayers living and working in another country may also be required to file. However, an automatic two months deadline extension is granted. The deadline for U.S. expats to file their U.S. tax returns is June 15.
U.S. income tax filing requirements for Expats
Generally, if any of the below applies to you, you must file IRS Form 1040 by the original or extended due date. This obligation is not synonymous with a tax liability or paying tax to the IRS. This filing obligation may entitle you to receive a tax refund even if you live abroad for example or you have earned income under the filing threshold below.
Your income, filing status, and age generally determine whether you must file an income tax return. Generally, you must file a US return for a tax year if your gross income from worldwide sources is at least the threshold amount for that year for your filing status.
For individuals under the age of 65 in tax year 2023, the filing thresholds are as follows:
Single Filing Status: If your gross income is at least $13,850, you are required to file a U.S. tax return.
Married Filing Separate Status: If your gross income is at least $5, you are required to file a U.S. tax return.
Married Filing Jointly: If you and your spouse's combined gross income is at least $27,700, you are required to file a tax return.
Head of Household: If your gross income is at least $20,800, you are required to file a tax return.
Qualifying Widow(er) with Dependent Child: If your gross income is at least $27,700, you are required to file a tax return.
For individuals aged 65 or older in tax year 2023, the filing thresholds are slightly higher:
Single Filing Status: If your gross income is at least $15,700, you are required to file a tax return.
Married Filing Separate Status: If your gross income is at least $5, you are required to file a U.S. tax return.
Married Filing Jointly: If you and your spouse's combined gross income is at least $29,200, you are required to file a tax return, if one of you is 65 years or older.
Married Filing Jointly: If you and your spouse's combined gross income is at least $30,700, you are required to file a tax return, if both of you are 65 years or older.
Head of Household: If your gross income is at least $22,650, you are required to file a tax return.
Qualifying Widow(er) with Dependent Child: If your gross income is at least $29,200, you are required to file a tax return
For dependent of another taxpayer, see the IRS Pub 501,Dependents, Standard Deduction, and Filing Information for more information on whether you must file a US tax return.
For self-employed individuals: If your net earnings from self-employment are $400 or more, you must file a return even if your gross income is below the amount listed above for your filing status.
An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.
A taxpayer qualifies for the special 2-month automatic extension if both their tax home and abode are outside the United States and Puerto Rico.
Those serving in the military outside the U.S. and Puerto Rico on the regular due date of their tax return also qualify for the extension to June 15.
Payments for taxes owed are due April 15:
Interest on late payment of taxes is compounded daily and applies to any tax payment IRS receives after the original April 15 deadline. For details, see the IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Automatic extension available to file a US tax return
Taxpayers living and working abroad who can’t meet the two months automatic extension, June 15 deadline can get more time to file, but they need to ask for it. An extension request must be filed by June 15. This extension gives American expats until Oct. 15 to file; however, this does not extend the time to pay tax.
How to file an extension:
One of the easiest ways to get an extension of time to file is through e-filing via Form 4868. Requests may also be made using a paper form. Form 4868 requires taxpayers to estimate their tax liability and pay any amount due by the original due date of their U.S. tax return.
Another option is to pay electronically, and the IRS will automatically process an extension when taxpayers select Form 4868 and are making a full or partial federal tax payment using Direct Pay by April 15, the Electronic Federal Tax Payment System (EFTPS) or a debit or credit card. There is no need to file a separate Form 4868 when making an electronic payment and indicating it is for an extension.
International taxpayers who do not have a U.S. bank account should refer to the Foreign Electronic Payments section on the IRS website for more payment options and information. IRS tax payments via bank transfers from overseas to the US may be very expensive. Please consider other payment alternatives that are more affordable.
Can I file my taxes for Free? Is there a Free File option?
Yes. U.S. citizens and resident aliens living abroad can use IRS Free File to prepare and electronically file their returns for free.
A second option, Free File Fillable Forms, the electronic version of IRS paper forms, has no income limit and is best suited to people who are comfortable preparing their own tax returns. Free File is not available to non-resident aliens required to file Form 1040NR.
Both the e-file and Free File electronic filing options are available until October 15.
One alternative to a free file, the do-it-yourself option, is to engage a qualified tax preparer: If your taxes are complicated or if you need a CPA assistance, contact us at info@whinglobal.com to get a tax consultation. We offer expat tax returns preparation.
Another alternative is to use privately available commercial software for a DIY tax preparation.
Reporting required for foreign accounts and assets:
Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.
In addition, certain expat taxpayers may also have to complete and attach to their US tax return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens, and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds.
Foreign accounts reporting deadline:
Separate from reporting specified foreign financial assets on their tax return, taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during the year, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Because of this threshold, Whin Global encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is available through the BSA E-filing System website.
The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is now the same as for a federal income tax return, April 15, but FinCEN is granting filers missing the original deadline an automatic extension until October 15, to file. Specific extension requests are not required.
Combat zone taxpayers get more time without having to ask for it:
Members of the military and eligible support personnel serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any taxes due. This includes those serving in Iraq, Afghanistan and other combat zones. A list of designated combat zones can be found in Publication 3, Armed Forces’ Tax Guide.
Various circumstances affect the exact length of the extension available to any given taxpayer. Details, including examples illustrating how these extensions are calculated, can be found in the Extensions of Deadlines section in Publication 3.
Expatriate reporting
Taxpayers who relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States must file a dual-status alien tax return, attaching Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with Internal Revenue Service, Philadelphia, PA 19255-0049, by the due date of the tax return (including extensions). IRS website has some information on Expatriation Tax to learn more.
Check tax withholding and estimated taxes to avoid an underpayment penalty
Taxpayers who owe tax can avoid having the same problem for the following year by increasing the amount of tax withheld from their paychecks. If self-employed, you may need to increase your quarterly estimated payments. The internal revenue service has an income tax withholding estimator for lesser complicated tax situations. Additionally, if you have w-2 income, you may want to update your IRS Form W-4 and submit it to your employer.
Investments in Foreign Companies
U.S. citizens with non-US investments may be required to disclose these ownership interests and report taxable income. If you own at least 10% or more of a foreign partnership or foreign corporation, you may have an information reporting requirement in addition to the required reporting of the income earned from these investments. There is also the GILTI (Global Intangible Low-Taxed Income) reporting requirement under the new TCJA passed in December 2017. This rule requires a US person owner of Controlled Foreign Corporations (CFC) to report their undistributed net CFC tested income as if the net income was distributed and repatriated. This anti-deferral rule may affect most Americans abroad who own at least 10% interest in foreign companies.
Under the TCJA, affected expats with the anti-deferral rule may be required to determine their CFC tested income and file Form 8992, Global Intangible Low-Taxed Income.
In addition, you may need to file Form 8858 if you have constructive interests, either directly or indirectly, in foreign disregarded entities, Form 5471 if you have interests in a foreign corporation, and Form 8865 if you have interest in a foreign partnership.
Also, a transfer of assets may trigger other disclosure requirements such as Form 8938, Form 926, or form 8865. Investing in foreign mutual funds may trigger filing Form 8621, information return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. There are many other international forms that are not listed here. For example, a gift or bequest from a foreign person in the amount of $100,000 or more requires form 3520. additionally, a foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b).
Report your tax and financial information in U.S. dollars
Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.
Both FinCEN Form 114 and IRS Form 8938 require the use of a December 31 US treasury exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently. For more information on exchange rates, see the following IRS website about Foreign Currency and Currency Exchange Rates.
Streamlined Filing Compliance Procedures
The IRS continues to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, whistle-blower leads, civil examination, and criminal prosecution. The IRS continues to use Streamlined Filing Compliance Procedures that will remain in place and be available to eligible taxpayers. But, as with OVDP, the IRS said it may end the Streamlined Filing Compliance Procedures at some point. Full details are available at the Streamlined Procedures IRS website.
According to the IRS, taxpayers concerned that their non-compliance may rise to the level of tax and tax-related crimes may consider coming into compliance with the tax law and avoid potential criminal prosecution. If you are considering coming into compliance, we recommend you consult with a tax professional and a legal adviser in determining which option is the most appropriate for you.
Because the circumstances of taxpayers with non-U.S. investments vary widely, the Internal Revenue Service offers the options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those investments:
1- The Offshore Voluntary Disclosure Program (OVDP) is closed.
2- Streamlined Filing Compliance Procedures;
3- Delinquent FBAR submission procedures; and
4- Delinquent international information return submission procedures.
Relief Procedures for Certain Former Citizens
According to the IRS, if you meet the requirements you will be relieved from paying the taxes and penalties for the current and five previous years. Here is an excerpt from the IRS official website related to this IRS relief procedures:
"Under the Relief Procedures for Certain Former Citizens (“these procedures”), the IRS is providing an alternative means for satisfying the tax compliance certification process for citizens who expatriate after March 18, 2010. These procedures are only available to U.S. citizens with a net worth of less than $2 million (at the time of expatriation and at the time of making their submission under these procedures), and an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years. If these individuals submit the information set forth below and meet the requirements of these procedures, they will not be “covered expatriates” under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years" (From IRS Website)
American expats, including digital nomads and short term cross border business travelers, should be familiar with this Official IRS website as a starting points of US taxation of international individuals
For more information on U.S. expat tax issues, please contact Whin Global by email: info@whinglobal.com, by Phone: +1.614.233.1025 or by mail/in person at our location: 470 W. Broad St. Suite 5112 Columbus, OH 43215.