Articles, Taxes

Expat Tax Filing 101: Top 10 Things Americans Need to Know

Written By: Veronica Rhodes
Reviewed by: Mike Reyes
Last Updated June 1, 2023

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Americans enjoy many perks, but citizenship also comes with many responsibilities, chief of which is taxes. Just because you are living and working abroad does not mean that you are exempt from paying state or federal taxes. In fact, American expats are taxed on their worldwide income, even if they do not live in the United States.

The U.S. tax code is already complicated enough if you live stateside. And when you are based overseas, paying taxes can be doubly difficult and even burdensome. Here are 10 things you need to know about expat tax filing to get you started.

#10: Expats are different from tourists

While the Internal Revenue Service (IRS) does not officially use the term “ex-pat” in any of its official documents, it generally applies to American citizens and permanent residents (more commonly known as Green Card holders) who live and work outside of the United States. 

They are different from travelers or tourists, who leave the country for a brief period with the intention of returning to the homeland. Expats must be familiar with U.S. tax rules for citizens living abroad to prevent potential tax issues.

#9: Expats have to file a tax return

The U.S. tax code applies to all Americans, wherever they may be. If you are an American citizen or permanent resident abroad, you must file a federal tax return every year.

Americans are taxed on their worldwide income. Even if your income comes solely from your host country or if you are exclusively paid in a different currency, you may still be liable for federal income taxes. The good news is the process for filing a return is mostly the same, whether you live in the U.S. or abroad.

#8: Expats need to report their foreign accounts

Apart from your income, you may also be obligated to report your foreign assets above a certain value.

For instance, foreign financial assets (e.g., real estate, stock holdings) with a total value of $200,000 are subject to Foreign Account Tax Compliance Act (FATCA) reporting requirements.

If you have foreign financial accounts such as pensions and bank accounts worth $10,000 and above, you must also file a Report of Foreign Bank and Financial Accounts (FBAR).

#7: Some people are not required to file a return

While all Americans are taxed on their worldwide income, some people are not required to file a tax return due to factors such as age, income, disability, and filing status.

The minimum filing thresholds are as follows:

  • Single Person: $12,400
  • Married Filing Jointly: $24,800
  • Married Filing Separately: $5
  • Self-Employed: $400
  • Head of Household: $18,650
  • Qualified Widow(er): $24,800

If your gross income meets or exceeds the minimum filing thresholds, you must file a federal income tax return.

#6: Expats are granted an automatic filing extension

While the usual tax day for most Americans is April 15th, those who are based abroad are granted an automatic 2-month filing extension until June 15th. 

Not all countries have the same tax calendar as the U.S., and the extensions give ex-pats enough time to process their foreign taxes before filing an American tax return. 

If you need more time to complete your returns, you may request a second extension until October 15th. All you need to do is to file a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

#5: Read up on tax treaties

Since most ex-pats also pay income tax to their host countries, there is the potential issue of double taxation. The United States has signed tax treaties with a number of foreign countries to solve potential tax issues between their citizens. These tax treaties also allow for information exchange between the two signatories.

#4: You may need to pay state taxes

While federal taxes are a given, you may assume that you no longer have to file a state return alongside your federal return. However, residents of certain states may be liable for state taxes even if they live and work overseas.

If you are a California, New Mexico, South Carolina, or Virginia resident, you may need to cut all ties or change your state residency before leaving the country. Otherwise, you could be on the hook for state taxes on your foreign income.

#3: Understand the Foreign Earned Income Exclusion

Many ex-pats take advantage of the Foreign Earned Income Exclusion (FEIE) to reduce or even eliminate their U.S. taxes.

For the tax year 2021, expats can exclude up to $108,700 of foreign-earned income. This means you do not have to pay federal tax if your income falls under that threshold. Remember that you are still expected to file a federal tax return and declare your income even if your total tax bill is zero.

However, ex-pats must meet the Physical Presence Test to claim this benefit. They must be physically based in a foreign country for at least 330 days in a 365-day period.

#2: Lower your ex-pat taxes with the Foreign Tax Credit

Another way to reduce your U.S. tax liability is to take a foreign tax credit. The foreign tax credit allows ex-pats to claim an equivalent dollar value of income tax paid to a foreign government.

Please note that you cannot take a foreign tax credit on income already excluded under the FEIE. However, you may take a foreign tax credit on income that exceeds the FEIE ceiling ($108,700 for 2021).

#1: How to file an ex-pat tax return abroad

Tax day is already stressful enough with the complications of filing taxes abroad. If you make a mistake on your return, you risk incurring fines and penalties. You may even forget to take advantage of the exclusions and deductions available to you. If you want to file a complete tax return, you need help from a professional.

For over 25 years, TFX has helped American expats prepare and file their tax returns. Their team of experienced CPAs and tax specialists can help you with any ex-pat tax problem you may have. They are renowned for their fast service and deep knowledge of different tax systems.

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