If you’re an American residing in a foreign country, it can be joyful to think that you have escaped the stress that comes with the tax season every April. That is, however, a misplaced belief. The truth is, whether you’re living outside the U.S. for a short-term gig, have decided to move permanently, or are attending a university, you’ll need to pay taxes as long as you’re a citizen of the U.S.
If you’re not sure about all the regulations and rules that apply to you when you reside outside the country, read on for some tax guidelines for U.S. citizens living abroad.
Do I Have to File Federal Taxes?
In most instances, resident aliens or U.S. citizens living outside the United States are subject to the same tax requirements as their U.S.-based counterparts. Put simply, your worldwide earnings can be taxed by the U.S. federal government. Also, if your gross income is above or equal to a specific threshold, you’ll need to file a return. The threshold is $400 for the self-employed, $12,000 for single filers under 65, and $13,600 for single filers 65 and older. For married couples filing jointly, the threshold is $24,000 (both under 65), $26,600 (65 or older), or $25,300 (one younger than 65, one 65 or older).
If your gross income is below these figures, you may not have to file income tax, but doublecheck IRS policy to verify the requirements for your specific situation. In addition, remember that there are still benefits to filing a return. If you are living abroad, the easiest way to claim the credits or deductions that you may be eligible for is to file returns in a timely manner.
Are Foreign Income Taxes Deductible?
Income earned in a foreign land may also be taxed by the host country’s government. However, even if you pay taxes in the country you’re living in, you still have to pay and file taxes with the Internal Revenue Service. The good news is that there are ways to lower your tax expense, such as the “foreign earned income exclusion” program. We’ll discuss your options shortly.
Can I Get an Extension?
If you’re living outside the U.S. on Tax Day, you’ll get a 2-month extension to file a return. (No need to apply for it—it’s automatic). This means that you have until June 15 to submit your return. With that said, you’re not entitled to any extra time when it comes to tax payments. You’re still required to pay your taxes by Tax Day, or the outstanding amount will begin accumulating interest from April 15.
The tax return can be mailed to the IRS Service Center in Austin. There is also an option to e-file your taxes through the Free File program if your gross income falls within the stated income limits. It’s also worth noting that Americans with the financial interest of more than $10,000 in a foreign bank account may be required to submit a Report of Foreign Bank and Financial Accounts. Remember, we’re talking about your personal taxes. Unless you become a citizen of another country and give up your U.S. citizenship, you’ll need to pay your dues no matter what.
Can I Reduce My Foreign-earned Income Taxes?
It’s possible. Americans living abroad can claim tax benefits on their foreign income via Foreign Earned Income Exclusion or Foreign Tax Credit. Here are the details of each of these benefits:
Foreign-earned Income Exclusion (FEIE)
The income you can claim as a deduction via FEIE is modified each year based on the Chained Consumer Price Index and was $104,100 last year. The most important thing you need to do in order to qualify is reside in a foreign country. Also, you have to pass either the physical presence or the bona fide residence test. It doesn’t matter whether the work is done for a U.S. or foreign company. However, self-employed Americans still have to pay the self-employed tax on their entire income, including the figure excluded for personal tax purposes. Also, claiming the FEIE may prevent you from claiming the additional earned income credit.
Furthermore, you may be able to deduct or exclude certain property amounts and the sum of lodging and food provided by your employer. However, it’s not possible to exclude the income received for serving in the military or as a civilian working for the U.S. government. When it comes to the two qualification tests, the physical presence test is the easiest to pass for Americans living outside the U.S. You just need to spend more than 330 days in foreign countries for a period of 12 months to start the test, ending or beginning the tax year in question. For instances where you want to qualify for a certain part of a taxable year, choosing a 12-month period will help maximize your deductions.
Foreign Tax Credit
If you don’t qualify for FEIE, you may still be able to reduce your tax burden through the foreign income tax credit. Americans who’ve paid foreign taxes on the income earned abroad may qualify for an itemized credit or deduction from the U.S. federal government if they’re also subject to IRS taxes on the same income.
Those who take the deduction are going to reduce their taxable income. On the other hand, U.S. expats who opt for the credit over the deduction will receive a dollar-by-dollar reduction in their tax liability. One important thing to keep in mind is that you can only claim an amount that is lesser than the sum of income taxes you paid to the foreign government, or the slab created by the IRS formula. Also, applicants can’t include the value-added taxes they spend on shopping or for foreign property taxes, as the credit only applies to the foreign income tax.
Filing tax returns when you’re living outside the U.S. can be a cumbersome process. We hope the information discussed above makes it easier for you. And if you owe back taxes, don’t hesitate to reach out to qualified tax relief attorneys to help you navigate the IRS labyrinth and resolve your debt in the most economical and stress-free way.