For Americans living abroad, the rules and requirements for US expat taxes can be overwhelming and confusing. Even worse, if you fail to file correctly, it can result in significant penalties or even legal repercussions.
Nonetheless, when strategically prepared for and filed correctly, there are huge benefits designed specifically for US expats.
This Guide to US Expat Taxes covers taxation for US citizens abroad with updated 2020 tax rates, filing thresholds, and more.
US tax filing thresholds
Even when living abroad, US citizens and Green Card holders must file a US tax return if they meet the filing thresholds. The 2019 tax year thresholds are:
|Filing Status||Gross income|
|Single (under age 65)||$12,200|
|Married filing jointly (under age 65)||$24,400|
|Married filing separately (any age)||$5|
|Head of household (under age 65)||$18,350|
If you are self-employed and had at least $400 in self-employment income, you also have to file. Furthermore, there are other circumstances where you should file a tax return, even though your income is below the thresholds.
Tax benefits for US expats
US expat taxes are different in many ways from the tax returns that you may have filed while living in the United States. While there are additional requirements for expats, there are also many opportunities for Americans abroad.
The primary credits and exclusions to reduce US expat taxes are the:
- Foreign Earned Income Exclusion (FEIE)
- Foreign Housing Exclusion or Deduction
- Foreign Tax Credit (FTC)
Through these exclusions, deductions and credits, many US expats can reduce or even eliminate their US tax burden.
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion can result in huge savings for US expat taxes. This is one of the most beneficial exclusions for many Americans abroad.
However, it is important to keep in mind that this exclusion must be applied for. It is not automatic. You must file a tax return and claim it. You must also meet the IRS’s residency requirements to qualify.
Through the FEIE, US expats can exclude up to $105,900 of their 2019 earnings from US income tax. In 2018 the maximum was $103,900. The IRS adjusts this amount each year for inflation, although the Trump tax reform in 2017 changed the inflation index to a slower growing index.
This exclusion applies to foreign earned income only. Income earned in the US is still subject to income tax.
Importantly, the FEIE only excludes income from income tax. If you are self-employed, you must still pay self-employment tax on your net earnings. The self-employment tax is 15.3% for the first $132,900 of income, plus 2.9% on net income in excess of $132,900.
If you move to a country with a Social Security Totalization Agreement and pay into that country’s system, you typically will not have to pay self-employment taxes.
Foreign Housing Exclusion
The Foreign Housing Exclusion or Deduction can be used to deduct housing expenses from your gross income on your US tax return. This is another very useful exclusion or deduction for US expat taxes. It helps to offset the higher cost of living in many foreign countries.
In order to qualify for the Foreign Housing Exclusion or Deduction, you must qualify for and use the FEIE. The FEIE and the Housing Exclusion or Deduction are claimed on the same form, Form 2555.
In most foreign countries, US expats can deduct or exclude between $30,000 to $50,000 in housing expenses. The exact amount varies depending on where you live. The IRS updates the limits each year.
Expensive cities have even higher exclusion limits. The city with the highest maximum exclusion is Hong Kong with $114,300. US expats living in Singapore can deduct up to $82,900 in housing expenses. This is an increase from the 2018 limit of $80,500.
Another city with expensive housing, Geneva, received an increase in its maximum exclusion from $93,300 in 2018 to $94,300 for 2019. On the other hand, the maximum housing exclusions for US expats in London decreased from $72,600 in 2018 to $69,200 in 2019.
You can typically deduct reasonable housing expenses that you, your spouse, or dependents incurred as a result of living abroad.
Expenses such as personal property insurance, leasing fees, rental furniture, parking rental, and repairs are all eligible for the Foreign Housing Exclusion or Deduction.
Housing expenses that are non-essential or deemed extravagant are not eligible for the Foreign Housing Exclusion or Deduction. Mortgage payments, costs associated with domestic labor, television services, internet, telephone, and purchased furniture do not qualify for exclusion or deduction.
Foreign Tax Credit
The Foreign Tax Credit (FTC) is another popular option for Americans living abroad. With this option, expats receive a dollar-for-dollar credit for taxes paid to another country. This can help offset or eliminate any taxes due to the US government.
It is important to remember that you cannot use the FTC for income that you have already excluded using the FEIE.
However, you can apply the Foreign Tax Credit against any income that exceeds the FEIE threshold or that was not excluded originally.
In countries with higher tax rates than the United States, using the FTC instead of the FEIE can make sense. You can even carry over unused tax credits from a high-tax jurisdiction for use at a later date when you move to a low-tax jurisdiction. Talk to an experienced expat tax accountant to evaluate which is better for your situation.
Reporting bank accounts and other financial assets
The Foreign Bank Accounts Report (FBAR), is a requirement for most Americans abroad. It is filed with the Treasury Department using FinCen Form 114.
This report was created as a part of the Bank Secrecy Act. It requires that you disclose your foreign financial accounts, such as bank accounts, brokerage accounts, and mutual funds.
Make sure you understand the specific requirements and file correctly. Failure to disclose all relevant accounts can lead to hefty fines.
You only need to submit the FBAR if the combined value of your foreign financial accounts was greater than $10,000 at any time in 2019. You must evaluate the combined values of any accounts which you have a financial interest in or signature authority over.
For example, you have one foreign brokerage account with a value of $4,000 in July and a foreign bank account with a value of $7,000 in October. The combined value of these accounts is over $10,000. This means that you have passed the threshold and you must file the FBAR.
The FBAR is a requirement of the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The form is submitted online through the Financial Crimes Enforcement Network’s BSA e-filing system.
You must keep record for each account that you report on the FBAR. The law does not specify what type of records you need to keep. Typically, banks statements or a copy of a filed FBAR is sufficient, as long as it includes the following information:
- Name(s) on the account
- Account number
- Name and address of the foreign bank
- Type of account
- Maximum value during the year
Records for each financial account should be kept for at least five years from the due date of the FBAR.
The FBAR is due on April 15, however, the government gives an automatic extension to October 15.
If you have other foreign financial assets such as mutual funds, foreign pensions, stocks, bonds, loans, and other investments you may also need to file Form 8938 (video). This form is due on April 15 along with your taxes.
The threshold for Form 8938 is higher than for the FBAR. The thresholds vary depending on whether you file as single or married.
If you are a US expat filing a joint return, you need to file Form 8938 if the value of your foreign assets is:
- more than $400,000 on the last day of the tax year, or
- more than $600,000 at any time during the year.
If you are a US expat filing as single, then you need to file Form 8938 if the value of your foreign assets is:
- more than $200,000 on the last day of the tax year, or
- more than $300,000 at any time during the year.
Please be aware that the filing thresholds for Form 8938 are significantly lower once you move back to the US.
Paying state taxes as a US expat
As an American abroad, it is important to be aware that you may still be liable to your state for taxes. What your obligations are will depend on the state.
The easiest states for US citizens abroad are those which do not require an income tax. This includes states such as Florida, Nevada, Texas, and Washington, among others.
Some other states have a neutral stance towards expats. These states will generally stop considering you a tax resident after you have been gone for a certain period. A few of these states may also ask you to file paperwork proving your new residency. Fortunately, in most neutral states you are unlikely to face many hurdles.
The most difficult and aggressive states are California, South Carolina, New Mexico, and Virginia. Issues have also been reported with Massachusetts, Maryland, and North Carolina. These states are also sometimes called “sticky” states.
It is important to be aware of your state requirements. If you stop filing and then return to live in the state, the state may notice the gap in your filings. If you cannot prove that you were a resident somewhere else during those years, they may ask you to file and pay taxes for those missing years.
2020 Expat tax filing dates
- April 15 – Regular tax due date. If you owe tax, make sure to pay estimated taxes by this date to avoid interest penalties.
- June 15 – Extended due date for expats, granted automatically if you are abroad on the regular tax due date. Still, interest accrues from April 15.
- October 15 – Extended deadline if you filed for an extension. You still have to pay any tax due by June 15 to avoid late payment penalties.
- December 15 – Extended deadline may be available at the discretion of the IRS.
Preparing your US expat taxes
Moving abroad and living as an expat is an exciting process. If you are a US expat, there are potentially significant tax benefits that you can take advantage of.
No matter where in the world you live, you can take care of your US expat taxes securely online. Schedule a free consultation with Online Taxman to ensure that you are maximizing the advantages of being an expat.