U.S. TAX INFORMATION FOR EXPATS

Americans living abroad are subject to the same U.S. income tax filing  requirements as those living in the United States. However their tax situation  is considerably more complex. In addition to complying with the tax laws of the  country in which they are resident they have a U.S. tax obligation.

Many expatriates aren't even aware of the fact that they have an obligation to file an income tax return until many years after they have been out of the country. Then….when they do realize that they should have been filing, it seems so overwhelming because it can be difficult to find someone to prepare old missing, unfiled tax returns here in the United States let alone when you're overseas. Expats must file a U.S. Income Tax Return and report their world-wide income from all sources, in any currency, unless it is below the minimum filing requirement. It  does not matter where earned, paid or received. They are required to file a  Form 1040 every year even if their foreign earned income is below the  excludable amount of $91,500 (for 2010). The earned income exclusion is not  automatic. It is an election and it can only be elected by filing a U.S. tax return with an attached Form 2555 (Foreign Earned Income).

While most American expats are required to file a U.S. tax return, their U.S. tax may be  reduced or eliminated by:

  • a foreign earned income exclusion (Form 2555) 
  • a housing expense exclusion or deduction (Form 2555)
  • a credit for foreign income taxes (Form 1116) 

FOREIGN  EARNED INCOME EXCLUSION 

Expats working abroad may qualify to exclude foreign income earned. The maximum  foreign earned income exclusion is available to expats who have lived in a  foreign country for a full calendar year (residence qualification) or who have  lived abroad for 330 days during a consecutive 365 day period (physical  presence qualification). Foreign earned income is income earned for work or  services performed in a foreign country during your period of foreign residence or presence.

If both husband and wife have foreign earned income, each is entitled to his/her $91,500 earned income exclusion.

HOUSING EXCLUSION OR DEDUCTION

Americans resident abroad are allowed an exclusion or deduction for a housing  amount. The housing amount is the excess of reasonable allowable foreign housing expenses for you and your family over a base housing amount subject to  a per city and country limitation. Allowable housing expenses include rent,  repairs, utilities (not including telephone charges), real and personal  property insurance, non-refundable lease fees, occupancy taxes and residential  parking. You can also include the allowable housing expenses of a second  foreign home if your family did not live with you at your place of employment  because of dangerous or other adverse living conditions.

FOREIGN TAX CREDIT

Income taxes paid to a foreign country may be credited against your U.S. tax on  your foreign income or claimed as a deduction. In almost all cases a credit is  more advantageous than a deduction. A credit directly reduces your tax  liability whereas a deduction only reduces your taxable income upon which your  tax is computed. A foreign tax credit is subject to limitations. Any excess  foreign tax not utilized as a credit in the current year because of limitations  may be available as a carryback to the first preceding year and then any excess not utilized in that year is available as a carryforward to the next 10 years.  However, any foreign tax attributable to excluded foreign earned income cannot be claimed as a tax credit or as a tax deduction on your U.S. Tax Return.

ALTERNATIVE MINIMUM TAX

A surprise to many taxpayers has been the Alternative Minimum Tax (AMT). When  originally enacted this tax was intended to apply to a small number of "rich"  taxpayers who were paying little or no tax as result of tax "breaks" they were  receiving. The AMT was intended to be a minimum additional tax for these taxpayers. Recent reductions in regular income tax rates, without a  corresponding reduction in the AMT rates, and the fact that AMT was never indexed for inflation has caused many more people to be subject to this tax for the first time. Fortunately many expats can offset all or part of this tax with a foreign tax credit.

DUE DATES

U.S. citizens resident abroad on April 15 are granted an automatic extension of  time to file to June 15. However interest accrues on any tax paid after April  15. An additional extension of time to file (but not to pay tax) to October 15  may be obtained by filing Form 4868 before the extended due date of June 15. In  addition to interest, late payment penalties may apply if you have not paid at  least 90% of your tax by June 15 including any payment made with Form 4868.

JOINT RETURN WITH NON-U.S. CITIZEN SPOUSE

If you are living abroad and your spouse is not a U.S. citizen you may elect to  treat your spouse as a U.S. resident for tax purposes. The major reason for  making this election is so that you can then file a joint tax return with the resulting lower tax rates, higher standard deduction and 2 exemptions. However, in making this election you must include your spouse's worldwide income but you can then elect the foreign earned income exclusion for your spouse if your  spouse is employed and otherwise qualifies. If you do not elect to treat your non-American spouse as a U.S. resident, you can never-the-less claim an exemption for your spouse if she/he has no U.S. source income and is not the dependent of another U.S. taxpayer.

U.S. WITHHELD TAX

If you are working abroad for a U.S. employer U.S. Income Tax is probably being  withheld from your salary. You may have your employer discontinue this  withholding by submitting a statement to your employer on Form 673 which  indicates that you expect to qualify for the foreign earned income exclusion.

ESTIMATED  TAX PAYMENTS

If you estimate that you will still have a net U.S. tax liability in excess of  $1,000, and it is more that 10% of the tax shown on your return after your foreign earned income exclusion and the foreign tax credit, you should make  quarterly tax payments to avoid a possible underpayment of estimated tax penalty. These payments are due April 15, June 15, September 15 and January 15 of the following year.

REPORT OF FOREIGN BANK ACCOUNT

Another report affecting most expats is the requirement to file a Report of  Foreign Bank and Financial Accounts (Form TD F 90-22.1). This information  report includes any financial interest in, or signature or other authority  over, a bank account, securities account, or other financial account in a  foreign country with a total value of all foreign accounts of $10,000 or more  at any time during the year. This report is filed separately from your Income  Tax Return and must be filed by June 30. There is no extension of time to file  available for this report.

The above comments are intended to give a  very brief overview of some of the more important and common tax rules affecting Americans living abroad. For those wishing to look further at these rules in detail, listed below are several sources which should contain answers to most questions and concerns.

For a very detailed explanation of the U.S. tax  rules applicable with updates to all Americas whether residing in the U.S. or abroad take a look at  http://www.irs.gov/

DUE DATES & EXTENSIONS 

The normal due date of April 15 for filing your U.S. Individual Income Tax Return (Form 1040) and paying any tax due is automatically extended to June 15  for Americans resident abroad on April 15. There is no special form to be filed  to obtain this extension but you must attach a statement to your return showing  that you qualify for the automatic extension. You will owe interest on any tax  paid after April 15. However, there are no late filing penalties (the 5% per  month or fraction thereof penalty) when an extension of time to file has been obtained to June 15.

FORM 4868

If you cannot meet the June 15 extended due date a further extension of time to file your return (but not to pay tax) to October 15 can be obtained by filing  Form 4868 prior to June 15. This extension is automatic with filing the Form. Interest is charged from April 15 on any unpaid tax. There is also a late  payment penalty of ½ of 1% per month if you have not paid 90% of your tax by  June 15, including any tax paid with Form 4868.

To minimize interest and a possible penalty you should make a "best guess estimate" of your unpaid tax and make a payment with your Form 4868, but this is not required to obtain the automatic extension. 

FORM 2350

If you have recently moved abroad and expect to qualify for the earned income exclusion under either the full calendar year residency test or the 330 day  presence test but you have not actually qualified under either test by June 15, the extended due date of your return, you can file Form 2350. This Form must be  filed prior to June 15 and requests a further extension of time to file your return until 30 days beyond the ending date of your qualification period. Interest will be charged on unpaid tax when you file your return. Also you may be charged a late payment penalty. Therefore it may be wise to make a tax payment when filing Form 2350. 

FORM TD F 90-22.1

The Report of Foreign Bank and Financial Accounts must be received on before June 30. There are no extensions of time for filing this report.

Any due date that falls on a Saturday, Sunday, or legal U.S. holiday is automatically  extended to the next business day.

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