Complete tax filing guide for US expats overseas

As an expat, or expatriate, you are in a new country temporarily and for work reasons.

Naturally, this means that there can be confusion around the topic of taxes for expats, and this is often seen with US employees in foreign countries who have never dealt with taxes there.

In this blog post, we’ll look at the topic of US expat tax and everything an expat needs to know about tax filing!

What is expat tax and are US citizens living abroad taxed on worldwide income?

Per IRS rules, even if American citizens are living and working abroad, they are still subject to taxation from the US tax authorities on their worldwide income, regardless of where they live or work.

So in short, yes, US expats will need to declare both foreign income and US-sourced income to determine if they need to file.

Put simply, if you are a US citizen and earn income over the tax threshold ($10,275), you’ll need to file a tax return.

That’s because the US is one of few countries to tax workers based on citizenship, not residency.

Generally, you’ll pay US tax on any of the following:

• Wages
  
  
• Interest
  
  
• Dividends
  
  
• Rental Income
  
  

2022 saw an increase in the Standard Deduction to $12,950 for single Americans and those married filing separately, while $25,900 is the figure for married Americans filing together.

Again, the rates will be different depending on whether the income is deemed ‘passive’ or ‘earned’ income.

Earned income is the most frequently seen income an expat will make - it’s the money earned in salary, wages, commissions, or tips.

Passive income is money you make from something that belongs to you, for example - gains you make from investing in stocks.

Earned income will be taxed according to regular IRS rates, whereas passive income is taxed at Capital Gains Tax rates.

Meanwhile, the IRS defines investment income as any money that you earn when selling something at a profit from what you paid for it.

That doesn’t mean, however, that there is US tax for US citizens living abroad. When filing expat tax returns, there are ways to offset what you may owe the IRS - more on that below!

Do expats have to pay US taxes?

While many expats will have to file a US tax return even if they live abroad, they usually don’t owe taxes.

A lot of expats are required to pay US social security tax and Medicare Tax.

This particularly applies to expats who work for an American employer. If you’re an expat with an American employer - you are required to pay US social security taxes at a rate of 6.2% and a rate of 1.45% on Medicare.

That is because there are a variety of laws set up to stop US expats from being taxed twice on foreign-earned income.

These include:

• The Foreign Tax Credit (FTC)
  
  
• The Foreign Earned Income Exclusion (FEIE)
  
  
• The Foreign Housing Exclusion
  
  

The Foreign Tax Credit

This tax credit allows expats who are earning income in another country that they are paying tax on to lower their US tax liability.

Essentially, for each dollar that is paid in foreign taxes, an expat can claim a credit on their tax bill.

To claim this you’ll need to file Form 1116.

If you are living and working in the UK, for example, the income tax rates are higher there than in the US, so by claiming the Foreign Tax Credit you’ll be able to offset your US tax liability.

However, this is not done automatically, so you will still need to file a US tax return to be able to claim it!

The Foreign Earned Income Exclusion (FEIE)

This is another example of an IRS exemption that US expats can avail of when filing their US tax return from another country. Again, it is used to lower their overall tax liability.

It allows expats filing abroad to have a certain amount of their earned income exempt from US taxation, usually over $100,000.

The exact amount changes every year, in line with inflation.

For example, the personal exemption threshold has risen over nearly $10,000 to $112,000 since 2018.

The amount you will be taxed is usually according to the stacking rule.

The stacking rule allows the FEIE to offest income in the lowest brackets, rather than the highest brackets, which is generally favourable to expats.

The stacking rule is calculated by taking the total tax on your taxable income minus the foreign income credit and housing cost exclusions. Then, that tax is figured on the total of your foreign earned income and housing cost exclusions.

The difference, if there is any, is the total tax liability for the US.

Expats must pass the Physical Presence Test by proving that they were physically not present in the US for at least 330 days in a 12 month period, in order to avail of this credit.

Alternatively, they can pass the Bona Fide Residence Test, which requires an expat to prove they’re a permanent resident of a different country.

This is done by showing evidence of a permanent residency visa, or that you pay foreign income taxes in the different country.

The Foreign Housing Exclusion

This allows a US citizen working abroad to exclude income they make from getting taxed on their US returns. It is based on foreign housing expenses.

Again, to avail of this you’ll need to pass the Bona Fide Residence Test and the Physical Presence Test.

It can be claimed in tandem with the FEIE.

When is the US tax deadline for expats?

 2022 US expat taxes are due on the same federal tax due date as US citizens, resident aliens, and non-residents living in the US - 18 April 2023! 

However, if you’re a US citizen/resident alien and are still living outside the US on the April due date, then you have an extension to 15 June 2023 to file your taxes. This June deadline can be pushed to 15 October if you apply for an extension with the IRS.

Form 1040 is what most US expats will need to file for their US taxes.

Tax treaties with the US

At this moment in time, the US has tax treaties with nearly 70 countries, all of which created to help prevent double expatriate tax of a US citizen working abroad by reducing or eliminating taxes on some income types.

You should always check to see if the US has a tax treaty with the country you are staying in to see if it is applicable to you.

What is double taxation?

Double taxation means that you have been taxed twice on the same income.

US expats usually incur double taxation when their income is taxed by both the US and the country they are in.

That’s because the US is one of two countries in the world that tax depending on citizenship - the other is Eritrea.

So, if you live in a different country that requires you to pay taxes, you could end up facing double taxation.

Taxback.com can help you to better understand your tax requirements when it comes to filing.

Prepare your US expat tax return

I made a mistake on my US expat tax return! What should I do?

Mistakes around the area of expatriate taxation are very common.

If you believe you made a mistake on your US tax return, you will need to file an amended tax return by filing Form 1040-X.

Penalties are often lesser the earlier you notice the mistake, so you will need to always be on top of your tax-filing requirements.

Can I file US taxes as an expat with Taxback.com?

Remember, all Americans working abroad will be taxed on their worldwide income and still need to file a tax return with the IRS.

Taxback.com offers expat tax services specifically designed to help with tax filing for US citizens living abroad.

While you may not end up paying tax, you still need to file a tax return. It’s the law.

By filing with us, you’ll ensure full compliance with the IRS. We can help with all the following:

• US Tax Return Preparation
  
  
• FBAR - Foreign Bank Account Reporting
  
  
• FATCA - Foreign Account Tax Compliance Act
  
  

Find out more about our tax services for U.S. citizens abroad here!