Filing Taxes While Living Abroad
Have you ever had a bad day or week and fantasized about moving to another country? It’d be great to just leave your bills and problems behind and start a new life abroad in those moments, right? However, at least one bill will follow you across the globe: your U.S. tax bill. Yes, that’s right. You’ll probably be filing taxes while living abroad. But don’t worry, we’re here to give you some important tips for doing just that.
Requirement for Filing Taxes While Living Abroad
United States citizens and resident aliens must file U.S. taxes while living abroad if they meet the minimum income requirements. You most likely won’t need to file taxes while living abroad if you don’t need to while living in the United States.
The IRS points out that, “Your worldwide income is subject to U.S. income tax, regardless of where you reside.” The IRS lists the definition of a U.S. citizen as being one of the following:
- A person born in the United States
- A person with a parent who’s a United States citizen (they note here that the two general ways to obtain citizenship through an American parent is at birth or after birth but before the person’s 18th)
- A former alien that has been naturalized as a U.S. citizen
- A person born in Puerto Rico, Guam, or the U.S. Virgin Islands
They also discuss how to determine the tax status of a resident alien saying, “You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1 – December 31.)” To pass the green card test, you must be a Lawful Permanent Resident of the United States during the calendar year. That is, unless you meet one of the following exceptions:
- You renounce and abandon this status in writing to the USCIS,
- The USCIS administratively terminated your immigrant status, or
- A U.S. Federal court terminates your immigrant status.
Deadline for Filing Taxes While Living Abroad
Although the IRS doesn’t have the most compassionate reputation, they aren’t unreasonable. The requirements for filing taxes while living abroad are a good example of this. While the deadline for filing your annual tax return in the States is April 15, taxpayers abroad get a little break.
“If you are a U.S. citizen or resident alien residing overseas or are in the military on duty outside the U.S., on the regular due date of your return you are allowed an automatic 2-month extension to file your return without requesting an extension,” the IRS says. We call this a “little” break because they continue, “Note that you must pay any tax due by April 15 or interest will be charged starting from April 15.”
You may file your tax return as late as June 15, although you’ll be charged interest on what is owed. Feel free to take advantage of the extension but do so cautiously. Depending on how much you owe, interest can be a surprising boost to your balance.
Foreign Credits Available for Filing Taxes While Living Abroad
Why should you file taxes while living abroad? After all, you don’t use the things your taxes pay for, right? Income taxes cover things like defense, education, social security, national parks, and highways. These are all things you don’t benefit from when living or working abroad. This is because all Americans are obligated to maintain the operation of the country. This task is very expensive.
In fact, it costs almost $3.5 trillion dollars to run the country every year. Income taxes only cover about 28 percent of those costs! The government uses loans from other countries and the purchase of new bonds to cover the rest. We must pay interest in both cases, making the cost to run the country even higher. But, getting into those details would take its own full article, so that’s all we’ll cover on it here.
The good news for citizens filing taxes while living abroad is that you have a choice. You may claim a Foreign Earned Income Exclusion or a Foreign Tax Credit.
Taking the Foreign Earned Income Exclusion When Filing Taxes While Living Abroad
The Foreign Earned Income Exclusion (FEIE) dismisses some taxable income from foreign sources on the U.S. tax return. However, any income earned over the exclusion amount will be taxed at the rate that would apply to the whole income amount. This is called the stacking rule; it was developed to ensure that citizens living and working abroad pay the same rate as citizens living and working in the U.S.
American Citizens Abroad points out that, “The exclusion applies only to foreign earned income. Other income, such as pensions, interest, dividend, capital gains, US-sourced income, etc., cannot be excluded with the FEIE. You are liable for the full US tax on this type of income.”
They also offer the following example:
You live in France and earned 118,000 U.S. dollars. The income source is your employer who is also in France. You take the standard deduction for married filing jointly with two children, which is $28,000. You can calculate the U.S. tax on this income as follows:
- The U.S. tax on $118,000 is $8,559.
- The U.S. tax on the exclusion amount ($ 103,900 in 2018) is $5,457.
- Subtract the tax on the exclusion amount from the tax on the whole amount: $8,559 – $5,457 = $3,102.
- Your tax liability: $3,102 approximately
Taking the Foreign Tax Credit When Filing Taxes While Living Abroad
The Foreign Tax Credit is applicable if your earned income was taxed by a country other than the U.S. The Foreign Tax Credit quite often allows a taxpayer to deduct the amount taxed by a foreign country. Form 2555 needs to be completed for this credit. The IRS explains, “If you qualify, you can use this form to figure your foreign earned income exclusion and your housing exclusion or deduction.”
A word of caution: Be careful to avoid claiming a foreign tax credit for foreign taxes on the amount excluded on the form. The U.S. only gives a credit for foreign taxation on the income that they’re taxing, as well.
American Citizen’s Abroad offers the following example of a Foreign Tax Credit:
- French tax on 118,000 U.S. Dollars is $14,516.
- $118,000 – $103,900 / $118,000 = a fraction: 0.119
- Multiply the fraction by the tax:
0.119 x $14,516 = $1,727
- Subtract the French tax from the U.S. tax amount:
$3,102 – $1,727 = $1,375
- Your tax liability to the U.S. is $1,375.
These calculations reveal which option result in the best benefit in your case.
How to Pay When Filing Taxes While Living Abroad
“Overseas taxpayers fill out the same forms any American citizen or resident alien does,” says Daniel B. Kline at the Motley Fool. “And like people who live domestically, they’re obligated to report their income in U.S. dollars even if they’re paid partly or in full in another currency.”
“Taxpayers generally use the yearly average exchange rate to report foreign-earned income that was received regularly throughout the year. However, if you had foreign transactions on specific days, you may also use the exchange rates for those days,” says the IRS.
Once the calculations are accurate and complete, you may file your return electronically.
Getting Help with Filing Taxes While Living Abroad
Filing taxes while living abroad can be a complex and involved process. While we skimmed the surface of the topic here, there’s still much to be discussed.
Tax Champions has been filing taxes for citizens living and working abroad for over 35 years. We’re no stranger to the intricate tax code pertaining to this task. We have a working relationship with the IRS that allows us to accomplish these filings in an efficient manner. Our professional and accredited staff takes pride in the thorough and careful preparation of your returns.
We offer a free case review to all of our potential clients. This gives you the opportunity to gain a better understanding of your case and how we can serve you. We’ll happily answer your questions and discuss your options. Our friendly staff is available 365 days a year, seven days a week for your convenience. Call us toll-free at 800.518.8964 or reach out to us by submitting your contact information in the blue box on the right side of this page. We’ll get back to you as soon as possible to discuss your needs. You can reach us during standard business hours, as well as most evening hours.
We strive to not only meet, but exceed our clients’ expectations and invite you to review our A+ rating at the Better Business Bureau. You’ll discover that we have no complaints with them, nor the IRS or Board of Accountancy. Reach out to us today and sleep better tonight. We’re looking forward to hearing from you.
Sources
[1] About Form 2555 | Internal Revenue Service. (2018, November 8). Retrieved from //www.irs.gov/forms-pubs/about-form-2555
[2] Alien Residency Green Card Test | Internal Revenue Service. (2019, January 29). Retrieved from //www.irs.gov/individuals/international-taxpayers/alien-residency-green-card-test
[3] Determining Alien Tax Status. (2019, March 18). Retrieved from //www.irs.gov/individuals/international-taxpayers/determining-alien-tax-status
[4] Immigration Terms and Definitions Involving Aliens. (2018, November 5). Retrieved from //www.irs.gov/individuals/international-taxpayers/immigration-terms-and-definitions-involving-aliens
[5] Kline, D. B. (2017, April 14). How Do U.S. Citizens Living Abroad Get Taxed? Retrieved from //www.fool.com/taxes/2017/04/14/how-do-us-citizens-living-abroad-get-taxed.aspx
[6] Tax Champions | Better Business Bureau® Profile. (n.d.). Retrieved from //www.bbb.org/us/ca/ventura/profile/tax-consultant/taxchampions-1236-92012281
[7] Taxpayers Living Abroad. (2019, January 29). Retrieved from //www.irs.gov/individuals/international-taxpayers/taxpayers-living-abroad
[8] U.S. Citizens and Resident Aliens Abroad. (2019, March 22). Retrieved from //www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad
[9] US Taxes Abroad for Dummies (update for tax year 2018). (2019, May 1). Retrieved from //www.americansabroad.org/us-taxes-abroad-for-dummies-update/
