Expatriates (or expats) are individuals who live or work in a country other than their nation of citizenship.
When it comes to taxes, American citizens living as expats are required to file a US federal tax return and pay taxes on their income. Preparing such a tax return is difficult but doable.
What follows are some questions commonly asked about filing an expat tax return.
Do Expats Pay Taxes? Yes. If they earn over a certain amount of foreign or domestic income and are a US citizen, they must file a US tax return. Taxable foreign income includes wages, interest, dividends and rental income.
Do Expats Have To File State Taxes? Maybe. Living out-of-country does not automatically exclude them from paying state taxes. It all depends on the state in which they lived prior to moving abroad.
Are There Expat Tax Penalties For Non-compliance? Yes. Scofflaws can face fines and penalties, lose their passports, or face jail time for serious tax evasion.
When Are Expat Taxes Due? Depends. Americans living abroad are granted an automatic extension in filing their returns to June 15 of that year. However, if they owe taxes the deadline for payment is April 15th of that year.
Can Expats Apply For An Extension? Yes. US taxes are reported on a calendar-year basis. If a tax return or Foreign Bank Account Report (FBAR) extension is needed, it must be requested by June 15 of that year.
Can Expats Be Double Taxed On Income Earned Abroad? No. Because US taxes are based on citizenship, the government provides ways that expats use to prevent double taxation. These aids include tax treaties, the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Consulting an expat tax advisor is highly recommended.
How To Qualify For The FEIE? Take a test … or two. To qualify for the FEIE, expats have to show they have been physically present in another country for 300 of any 365-day period, or they can take the Bona Fide Residency Test by showing they have lived overseas for at least one calendar year and have no clear plans to move back to the US. Both tests require an accurate accounting of the time spent in another country.
What Are The Usual Forms To File Out? More than many realize. Some of the more common forms to file are as follows: Form 1040, FinCEN Form 114 (FBAR), Foreign Tax Credit Form 116, Foreign Account Tax Compliance Act (FATCA) Form 8938, Form 5471, Form 8621 and Form 3520.
What Happens If An Expat Weds a Non-Resident? Tread carefully. While there are a few different tax options, each comes with its own challenges that if not done correctly can have serious financial consequences.
Do Dependent Children Help Reduce Expat Taxes? Probably. The Child Tax Credit can help expats with dependent US children who have a social security number. Additionally, expats may be able to use the Child and Dependent Care Credit; however, expats must have earned income to use this credit.
If Expats Renounce Their US Citizenship, Do They Still Have To Pay Taxes? No. But only if they can provide a record of having paid their taxes for the five years prior to the date of renunciation.
Can Expats Receive Social Security Benefits? Yes. Just about any country in the world allows for this. Expats are reminded that their Social Security benefits must be reported on their US tax return.
What If Expats Forget To File Their Taxes? There is hope. While some do forget that they have a tax filing requirement, the Internal Revenue Service offers several programs to remove or reduce the penalties for late filing, the most prominent of which is the Streamlined Offshore Filing Procedures.
Many expats can also file the last three years of their tax returns and the last six years of Foreign Bank Account Reports (FBAR) and be caught up.
Is It Worth Being An Expat American? Yes. Living and work abroad are wonderful opportunities – as long as one is aware of the filing of taxes’ challenges.
Expat tax officials are unanimous in recommending that citizens thinking about living overseas a) obtains advice about their tax situation prior to leaving and that when living abroad they b) use an expat tax expert to help them pay their taxes.
Bon voyage!