US Tax Reporting for Americans Residing Overseas - An Overview
"Taxation with representation ain't so hot either." - Gerald Barzan
Amidst all the challenges and excitement of moving abroad, taxes are typically at the back of the minds of most expats.
For Americans however, moving abroad doesn’t mean leaving your IRS reporting obligations behind, as you’ll still have to file a US tax return.
Furthermore, US reporting from abroad is different, as there are more forms to file, often foreign currencies to be converted into US dollars, and there may be a foreign tax system to take into account, too.
In this article, we’re going to provide an overview of the rules for reporting US taxes for American citizens and Green Card holders living overseas.
In this article, you’ll learn about:
• The US tax system and citizenship based taxation
• Tax systems in other countries
• US filing and reporting overview for expats
• US self-employment taxes for expats
• Finding an expat tax accountant
The US tax system and citizenship based taxation
The reason why American expats have to file US taxes from abroad is because the US tax system is different compared to other countries.
The US has what is called a Citizenship Based Taxation system, which means that all US citizens (and residents, including Green Card Holders) are taxed on their global income, wherever in the world they are.
BOX - CBT Origins The system was first introduced in the 1860s, when the federal government was short of funds during the Civil War and hit upon the idea of continuing to tax US landowners who had moved abroad to avoid the fighting. After the war, it never got reversed, as it wasn’t considered enforceable - until the age of the interconnected international digital banking in the 21st century, that is.
CBT has been challenged in court, particularly with non-US income also being taxed, however the challenge was overruled on the basis that Americans living abroad still enjoy the benefits of US citizenship, such as voting rights and the right to return and live in the US.
Most Americans who move abroad either don’t know about the requirement to keep filing US taxes or ignore it, assuming that the IRS can’t enforce it anyway. In the twenty-first century though, the interconnected international digital banking system means that the IRS can look at expats’ finances globally.
Tax systems in other countries
Almost every other country has either a residency based tax system, which means just taxing those people who live in the country, or a territorial tax system, which means just taxing income generated in the country.
This means that most Americans living abroad will also have to pay taxes in the country where they live, depending on the rules and residency qualification in that country.
Furthermore some countries have a different tax year, including:
• The United Kingdom: April 6 - April 5
• Australia (and Pakistan): July 1 - June 30
• South Africa: March 1 - February 28
• New Zealand, India, Barbados, Belize, Botswana, and Jamaica: April 1 - March 31
Not all countries require residents to file a return though, as many, particularly in Europe, deduct income tax from wages at source before it's paid. This means that if you don’t have any other income, you don’t need to file an annual tax return in that country.
US filing and reporting overview for expats
All Americans, including those living abroad, have to file Form 1040 every year reporting all of their worldwide income, if their total income exceeds the Standard Deduction amount ($12,950 for tax year 2022 for individual filers, $25,900 for joint filers), or if they have any self-employment income, or if they are married but file separately to a foreigner who isn’t a US citizen or Green Card holder.
In general, if you’re married to a foreigner who isn’t a US citizen or Green Card holder, it might not be advantageous to file jointly. This is because if you file jointly, you’ll need to obtain a US Taxpayer Identification Number for them and you will effectively render all their current (and future) income and assets liable to US reporting and tax!
If you have income earned in currencies other than US dollars, you have to convert it into USD using either the Treasury published rates, or a reputable currency conversion source before reporting it in your US tax return.
The IRS cites X-rates, Oanda, and xe as reputable sources on the IRS website.
Most expats have to file other forms additionally, such as:
• IRS Form 2555 to claim the Foreign Earned Income Exclusion
• IRS Form 1116 to claim the Foreign Tax Credit
• FinCEN Form 114 to report foreign financial accounts
• IRS Form 8938 to report foreign financial assets
• IRS Form 5471 to report a foreign registered corporation
There are specific rules relating to all of these forms that are covered in other articles.
Americans living abroad have to pay any US tax they owe by April 15th, however if you live abroad, you don’t have to file until June 15th.
Any expat who earns under the FEIE limit or who pays more foreign income tax at higher rates than the US rate won’t normally owe any US tax anyway if they claim the Foreign Tax Credit or the Foreign Earned Income Exclusion when they file their US return (note that this assumes they don’t spend time working in the US during the year).
If you live in a country like the UK or Australia, which follow a different tax year, and you need more time to file your UK/Australian taxes first, you can file Form 4868, giving you until October 15th to file.
If you’re still not ready to file by October 15th, you can apply to the IRS in writing for a discretionary extension until December 15th, explaining why you need the extra time.
The deadline for reporting foreign registered financial accounts on FinCEN Form 114 is currently October 15th (thanks to an automatically applied extension from April 15th).
All other filing deadlines are the same as in the US, such as US S-Corp, C-Corp, LLC, and Partnership filing, and quarterly, estimated self-employment tax payments.
US self-employment taxes for expats
Americans living abroad have to report their self-employment income on Form 1040 and pay US self-employment taxes. These consist of 12.4% social security tax and 2.9% Medicare tax (for a total of 15.3%).
Unfortunately, US social security taxes can’t be reduced by claiming the Foreign Tax Credit or the Foreign Earned Income Exclusion.
That being said, the US has signed double social security tax treaties (called Totalization Agreements) with around 30 other countries.
Finding an expat tax accountant
Due to the additional rules and forms for Americans overseas, most expats choose to find an accountant to help them file, as the IRS has a global reach and the consequences for getting filing wrong can be significant.
In 2010, the US passed the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign banks and investment firms to report their American account holders to the US Treasury, including their contact details and account balances.
FATCA has given the IRS the ability to snoop on US expats’ finances globally in the name of reducing tax evasion, as well as check whether expats are reporting their foreign account balances correctly on FinCEN Form 114.
In general when filing from abroad, you have 4 options:
• DIY - doing it yourself is only advisable if your financial situation is very straightforward, such as if you are posted abroad working for a US firm for a year still paid in the US (so with no foreign accounts or income) and just have to file Forms 1040 and 2555.
• A US-based tax professional - It’s important to find an accountant who has experience with expat filing. As most accountants in the US with no expat clients don’t have experience with tax treaties, foreign tax systems, and other expat issues, they normally won’t be able to ensure that you file from abroad in the way that is in your best interest.
• An expat tax software - If your situation is relatively straightforward, there are some great online expat tax filing softwares available.
• Expat CPA or EA - Most expats choose to work with an experienced expat tax accountant who has either an EA (IRS Enrolled Agent) or CPA qualification.
If you have any questions, don't hesitate to contact us.
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