Moving abroad is an exciting decision for many Americans. However, US taxes for expats can be a headache. There are extra reporting requirements, different deadlines, and new exclusions and credits. The incorrect filing of US taxes can result in the loss of hundreds or thousands of dollars.
Filing US taxes from overseas seems overwhelming but it doesn’t have to be.
Fortunately, there are ways for Americans abroad to capitalize on big savings opportunities. In this article, we answer the 9 most common questions Americans abroad have about tax.
1. Do you have to pay US taxes as an expat?
As an American abroad, you are still required to file taxes in the US.
However, you may not owe any US income taxes. This depends on how you file and the exclusions or deductions you are eligible for. For example, you may qualify to exclude a significant amount of income from US income taxes with the Foreign Earned Income Exclusion (FEIE).
To minimize your tax liability with the Foreign Earned Income Exclusion it is important that you:
- Stay abroad for at least 330 days in a 12 month period (the Physical Presence Test), or
- Establish bona fide residency in another country (the Bona Fide Residence Test).
The IRS has very specific rules for calculating your days spent in foreign countries, e.g., days spent in travel, US flight layovers. Our Guide to the Physical Presence Test explains the details.
If you are establishing bona fide residency in another country, you need to prove to the IRS that your life is fully tied to another country. The IRS reviews these on a case-by-case basis.
2. How much tax do US citizens living abroad pay?
You may not owe any tax at all, owe less taxes than when you lived in the US, or still have taxes to pay. This depends on several elements of your tax situation.
The following factors can all have an impact on expat taxes:
- Amount of time spent in the US
- Residency status in another country
- Taxation rate of the country of residence
- Housing in another country
Through careful planning, most American expats can significantly reduce or eliminate their US tax burden.
3. Do US expats have to pay taxes in two countries?
Potentially, yes. As a US citizen and a resident in another country, you are responsible for your tax obligations in both countries.
Fortunately, you may be able to reduce the amount of US taxes owed. This depends on the credits and exclusions many expats can claim.
Making sure that you are utilizing all the credits and exclusions correctly and effectively is crucial. Most US-based tax accountants are not familiar with the expat-specific tax provisions. Find a local and a US accountant who both are experts in expat tax. They will help you follow all relevant laws and minimize your taxes.
If you don’t have a US tax accountant who has experience with expats, check out this guide on how to find one. If they work with a lot of expats, they should be able to connect you with a local accountant in your country. (We have local partners in many countries.)
4. How can US expats reduce taxes?
Foreign Earned Income Exclusion (FEIE)
With the FEIE, you can exclude up to $107,600 (2020) of your income from income taxes. The exclusion amount increases to $108,700 in 2021.
As mentioned above, to use the FEIE, you must prove to the IRS one of the following:
- You spent 330 days in foreign countries during a 12-month period, or
- You established bona fide residency in another country.
If you need more time to qualify for days spent out of the US, you can request an extension for filing your tax return. But make sure you pay any tax you may owe by the original due date to avoid penalties.
Foreign Housing Exclusion
In addition to the FEIE, you can use the Foreign Housing Exclusion to deduct eligible housing expenses from your taxable income. Expenses such as rent, repairs, and utility qualify for the Foreign Housing Exclusion.
Foreign Tax Credit
With the Foreign Tax Credit, you can claim a dollar-for-dollar credit for the amount paid in taxes to another country. You cannot use the tax credit on income that was already excluded through the Foreign Earned Income Exclusion.
These expat tax benefits can result in significant savings.
5. Which tax forms do expats need?
As a US citizen living abroad, you need to make sure that you have the correct paperwork for tax reporting.
In addition, if you have a foreign business, you may need Forms 5471, 8858, or 8865. And passive investments may require Form 8621.
If you have offshore financial accounts and assets, you may need to use two additional forms:
- FinCEN form 114 (also known as the FBAR) – This form is not filed with the IRS but with the Department of Treasury.
- Form 8938.
The FBAR, or Foreign Bank Account Report, is a form on which you report any foreign financial accounts you hold or have power over. It is required once the total value of these financial accounts have a combined value of over $10,000 at any time during the year.
Form 8938 is a separate form used to report foreign financial assets. Mutual funds, foreign pensions, stocks, bonds, loans, and other investments are all reported on Form 8938.
The specific tax forms that expats need depend on the individual situation. Speak to an experienced expat tax accountant. (Don’t rely on DIY tax software – many situations applicable to expats are labeled “this is uncommon” and often lack specific instructions.)
6. Do I need to pay state taxes if I live overseas?
State taxes for expats vary depending on the state that you were a resident of before moving abroad.
Some states have strict requirements to prove you are no longer a resident. Other states are simpler and do not require that you submit any paperwork or change addresses.
To avoid state taxes from a more difficult state, you may want to move your residence to a new state or provide evidence that you are no longer living in your old state.
7. When do US expats file taxes?
Expats receive an automatic extension for filing taxes. As an American living outside of the US on April Tax Day, you don’t need to file taxes until June 15th.
You can request an extension until October 15th if you need more time to get all paperwork or to qualify for the FEIE.
In special circumstances, expats can even extend until December 15th.
Even though expats receive an automatic filing extension, any US taxes owed are still due by April 15th. After April 15th, interest starts accruing. Additional late payment penalties start after the June deadline, even if you have an extension to file.
(In 2021, the individual filing date was extended from April 15th to May 17th, 2021. This means that interest for owed tax starts accruing after May 17th.)
8. What happens if you renounce your American citizenship?
Renouncing US citizenship is a significant decision. The process is complex and can be costly.
Importantly, renunciation is not an easy way to stop paying taxes. In fact, when renouncing, you may be subject to a hefty exit tax and other expenses.
If you do decide to renounce, it is important to work with an accountant to ensure that your assets and business are structured correctly.
9. Where can I find more resources?
If you are new to filing taxes from abroad, our Guide to US Expat Taxes gives a good up-to-date overview. For more in-depth reading, check out our book US Taxes For Americans Abroad – The Easy Guide To Saving Money on Amazon. (One review called it “A must-have resource and reference for US taxpayers overseas“.)
We also have these tips before moving abroad because expat tax planning starts before you leave home.
US Taxes for expats don’t have to be complicated
Living abroad is an exciting decision with many benefits. However, it is important to be aware of the US tax implications.
Ensuring that you are in compliance and capitalizing on all of the fiscal benefits of being an expat is key. For peace of mind, use an experienced expat tax accountant. Contact Online Taxman today for a personalized consultation.