Americans who find another country to call home may have an abrupt wake-up call during tax season. Staying compliant with US expat taxes can be complicated by a lack of understanding of the US tax code.
US citizens living abroad are still required to pay US taxes. If you’re a US expatriate, here’s everything you should know about your US tax requirements!
Do I have to pay US taxes if I live abroad?
Yes, US expats are subject to paying taxes in the United States if they meet specific criteria. If you are a US citizen living abroad and earn over the minimum income amount (domestic and foreign income combined), you must file a US tax return.
The income taxed can consist of:
- Salary
- Wages
- Alimony
- Capital gains
- Dividends
- Interest
- Royalties
- Rental Income
When filing US taxes, expatriates should be aware of the following:
- Tax Deadline: Expats must file their taxes by the same deadline as US taxpayers, April 15 each year (or the following Monday if April 15 falls on a weekend or holiday).
- Foreign Earned Income Exclusion: Expats may be eligible to use the Foreign Earned Income Exclusion to exclude a certain amount of their foreign-earned income from US taxation.
- Foreign Tax Credit: Expats may also be eligible to use the Foreign Tax Credit, which allows them to offset their US tax liability by the amount of foreign taxes they have paid.
- FBAR Filing: Expats should be aware of the FBAR filing requirement if they have foreign bank accounts with a total balance of $10,000 or more at any point during the year. You may also be required to file additional forms, including FATCA (Form 8938).
For a better understanding of what works best for your unique tax situation, the tax preparation team at Gordon Law can help ensure that you comply with all relevant tax laws and take advantage of any available tax benefits!
Are US expats required to pay state taxes?
Whether or not US expats are required to pay state taxes will depend on the state where they lived and earned income before moving abroad.
Some states have income taxes and may require expats to file a state tax return and pay state taxes, even if they live and earn income outside the US. Other states do not have income taxes and will not require expats to pay state taxes.
Tax benefits for US expats
US citizens and resident aliens who live and work abroad may be able to claim certain tax benefits to lower their tax liability.
Some of the potential tax benefits that US expats may be eligible for include:
- Foreign Earned Income Exclusion
- Foreign Housing Exclusion or Deduction
- Foreign Tax Credit
These can help reduce your U.S. taxable income and potentially lower your overall tax bill.
Our experienced international tax lawyers can help you identify which foreign tax credits you qualify for to help you save money on your next US tax return.
Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion (FEIE) allows American expatriates to exclude up to $112,000 (tax year 2022) of their foreign-earned income from their US taxable income, depending on filing status and the amount of foreign-earned income.
The IRS defines foreign-earned income as income you receive for your services while living abroad; it does not include other forms of income, such as dividends, rental income, or capital gains. To claim the Foreign Earned Income Exclusion, you are required to file IRS Form 2555 with your US tax return.
Foreign Housing Exclusion or Deduction
The Foreign Housing Exclusion or Deduction allows US citizens and resident aliens to exclude or deduct certain housing costs from their US tax bill.
The exclusion or deduction amount is a percentage of your foreign-earned income and is generally limited to the amount of your housing costs that exceed the IRS’s base amount. The base amount is $37,950 for 2024.
If you decided to claim the Foreign Housing Deduction instead, you would be allowed to deduct your housing costs from your taxable income. For some US expatriates, this deduction could erase most tax obligations.
Foreign Tax Credit
The Foreign Tax Credit allows US citizens and resident aliens who have paid foreign taxes on their foreign income to use that payment as a tax credit for their US taxes.
To claim this credit, taxpayers must have a foreign income source subject to US and foreign taxes. To calculate the foreign tax credit, multiply the foreign tax paid by the applicable US marginal tax rate.
To claim the Foreign Tax Credit, taxpayers are required to file IRS Form 1116 in addition to their tax return and itemize their foreign sources of income. Any excess foreign taxes paid can be carried over toward future tax years.
Are US expats required to file FBAR & FATCA Form 8938?
Filing taxes as an expat can be frustrating with so many forms involved.
The Foreign Bank Accounting Report (FBAR) requires any US citizens with financial interests in or signature authority over foreign financial accounts with a value of more than $10,000 at any time during the tax year to submit the FBAR form to FinCEN.
Additionally, US expats with certain foreign financial assets are required to report those assets to the IRS by filing Form 8938, Statement of Specified Foreign Financial Assets (otherwise known as FATCA).
Need help understanding which forms you’re required to file? Reach out to our experienced international tax attorneys for help!
Unfiled expat tax returns
Some US expats may go years without realizing they still have US filing requirements. If you find yourself in this situation, there are options to avoid harsh tax penalties and get caught up on delinquent international returns.
The Streamlined Foreign Offshore Procedures are a way for US expatriates who are behind in their US tax filing and payment obligations to catch up without facing penalties.
To learn more, check out our complete guide to IRS Streamlined Foreign Offshore Procedures.
What are US expat tax penalties?
If an expat fails to file a US tax return or pay the taxes that they owe, they may be subject to penalties and interest charges. The IRS tax penalties that an expat may face will depend on the circumstances of their case.
Some common penalties that expats may be subject to include:
- Failure-to-pay penalty: If an expat does not pay the total amount of taxes they owe, they may be subject to a penalty of 0.5% of the unpaid taxes for each month the taxes remain unpaid. The penalty is in addition to the late payment penalty and accrues until the taxes are paid.
- Failure-to-file penalty: If an expat fails to file a tax return, they may be subject to a penalty of 5% of the unpaid taxes for each month the return isn’t filed, up to 25% of the due taxes. The fine is in addition to the late filing penalty and accrues until the return is filed.
It is crucial for US expats to understand their tax obligations and to take the proper steps to avoid these penalties.
If you’ve found yourself in hot water, our tax debt lawyers can help you analyze the best strategy to get back into good standing with the IRS.
5-star tax services for expats
Your international tax filing doesn’t have to be complicated! Our tax attorneys are highly experienced with tax preparation services for US citizens living around the globe.
Why choose Gordon Law?
- Virtual meetings and digital documents make it easy to work with us from anywhere
- Our skilled tax attorneys have focused on offshore tax compliance since 2012
- We’ll make sure you’re compliant with FBAR filing and other offshore tax disclosures
- We accept cryptocurrency for easy international payments!
