Facts You Need to Know about U.S. Taxes While Living and Working Abroad
By I.J. Zemelman, EA. Tax Operations Director at Taxes for Expats
The task of filing a US income tax return in and of itself can get very confusing, but having to file a US expat tax return is even more complicated of a task. It’s not uncommon for US Expats to have a long list of questions. While answers can be found on irs.gov, the website can be difficult to navigate and hard to understand. Here are some of the top questions asked by American Expats along with simplified answers.
Am I Required to File a Federal US Income Tax Return While Living and Working Abroad?
Unless you are making less than around $9K per year, yes, you will be required to file a Federal US income tax return. There are different filing thresholds for different levels of income, age, and filing status, but most US Citizens and Green Card Holders living and working abroad will be required to file a US expat tax return and report all worldwide income. While there are a variety of deductions and exclusions available to US Expats, these can only be claimed be reporting all income and foreign taxes which generated in another country. In addition to the deductions available to you, many countries have a tax treaty in place with the United States to help taxpayers avoid double taxation.
Am I Required to File a State Income Tax Return While Living and Working Abroad?
Every state has its own tax rules and regulations. If you lived in a state in which income tax is not assessed (Florida, Nevada, Texas, and Washington), you will not be required to file a state return while living and working abroad. There are a few states like California, New Mexico, South Carolina, and Virginia where it’s extremely difficult to get out of filing a US State tax return. In these states, if you own property or a bank account or if you maintain your voter registration, you will be required to file an annual state income tax return no matter how long it’s been since you lived there.
Am I Required to File a US Expat Tax Return for Retirement Income?
Generally speaking, yes. If you are living abroad for your retirement and you have employer-sponsored or deferred pension plans, you will be required to report all worldwide income just as if you would if you were living in the United States. If you are unsure – see a full article we wrote about this issue: http://www.taxesforexpats.com/expat-tax-advice/why-file.html.
As a retiree living in a foreign country and receiving pension payments from a stateside employer, you may be able to claim an exemption from tax withholding by the United States. If your host country has an active tax treaty with the US, you may file Form W-8BEN with your former employer to qualify for a withholding exemption.
What Forms Will I Be Required to File?
Whether or not you’re reporting income earned by salary or retirement, you will be required to file Form 1040 exactly as you would if you were living in the United States. We will discuss some other forms which may be required for your situation, but first we will take a look at forms you will need to file with Form 1040 in order to claim available deductions and exclusions.
If you want to take the FEIE (Foreign Earned Income Exclusion – explained later) which allows you to deduct up to $92,900 (for 2011 tax year – 2012 will be $95,100) in foreign earned income from your taxable income in the United States, you will need to file Form 2555. If you paid foreign taxes and wish to take a credit on these taxes against your US income, you will need to file form 1116 for the Foreign Tax Credit.
Additional forms you need to file will depend on your individual circumstances. Here are some of the most common forms which may apply to you as a US Expat:
Schedule A, Itemized Deductions: You can choose to take a standard deduction or itemize your deductions such as medical expenses, mortgage interest, charitable donations, casualty theft and losses, and other expenses.
Schedule B, Interest and Dividend Income: If you have income deriving from financial accounts all of this will need to be reported on Schedule B.
Schedule C, Self Employment Income and Expenses: If you are self employed you will need to report your profit and loss on Schedule C.
Schedule D, Capital Gains and Losses: If you have income from investments you will report your gains and losses on Schedule D. You cannot report more in losses than you had in gains.
Apart from the forms you may have to file with Form 1040, there are additional forms you will need to file – not for the IRS, but for the Department of Treasury. If you have foreign financial accounts for which there is a combined total balance of at least $10K (at any point during the calendar year), you will be required to report such accounts on Form TD F 90-22.1. This form needs to be received by the Department of Treasury no later than June 30. If you receive an extension on your tax filing deadline (as explained below), it does not apply to Form TD F 90-22.1; if you fail to file this report on time you may be subject to penalties of at least $10K. If you have sizable foreign financial accounts (over $200K), you will also be required to file Form 8938: Statement of Foreign Financial Assets.
What is the US Expat Tax Return Filing Deadline?
As a US Expat living and working abroad, you are automatically granted a 2-month extension to file your taxes. That means that instead of being due on April 15, you don’t have to file a US expat tax return until June 15. You may also request an additional 4 months for a tax return due date of October 15 by filing Form 4868. It’s imperative that you understand that a filing extension does not apply to any taxes owed to the IRS. If you think you may owe the IRS upon filing your US expat tax return, your payment must be sent no later than April 15. Use Form 1040ES to estimate the taxes you owe to the United States. Failure to remit payment on time will result in late penalties and interest being assessed and applied to your balance.
In Which Currency Should My Taxes Be Filed?
When it comes to filing a US expat tax return, the country in which you reside is not important; you must file your US expat tax return in USD. It is recommended by the IRS to use the average exchange rate for the year as we report on IRS Offical FX Rates.
Do I have to Report All the Income I Earned Working Abroad?
Yes, but a portion (if not all) may be excluded by claiming the Foreign Earned Income Exclusion (FEIE). In order to claim the FEIE, however, you must meet either the Physical Presence Test (meaning you’ve resided in your host country for at least 330 days) or the Bona Fide Residence Test (meaning you’ve resided in your host country for a full calendar year). As indicated earlier, you can claim the FEIE by filing form 2555 and attaching it to Form 1040.
I’m Married to a Non-US Citizen. Must I Report My Spouse’s Income?
No, you do not have to claim your spouse’s income if your spouse is a non-US Citizen, but you may elect to do so. Because of the FEIE amount for married couples filing jointly, it makes sense for some married couples to file a joint return when one of them is a non-US Citizen. Imagine, for example, that you earn $120K and your spouse earns $60K. If you’re going by the 2012 FEIE, you are able to claim up to $190,200 as a married couple filing jointly. If you were filing alone, you wouldn’t be able to claim more than $95,100 – meaning that you would have an additional $24,900 on which you would have to pay taxes.
Will My Rate of Taxation be Determined by My Host Country?
With the presence of a tax treaty, there may be an opportunity for you to claim exemption or a reduced tax rate on certain types of income as dictated by the active treaty. If you are earning income in a country which does not have a tax treaty in place, you will be subject to the standard US income tax rate for your specific tax bracket. If you are required to file a State US tax return, remember that not all states abide by the provisions of an international tax treaty, so you may be required to pay taxes which are exempt or reduced on your Federal return. If you have questions about an active treaty with your host country, make sure to speak with a US expat tax expert to gain clarification.
How Will My US Social Security Obligations Be Affected?
Your obligations to contribute to US Social Security will depend on the type of your employment, the location of your employer, and whether or not the United States has an active Totalization Agreement in place with your host country. A Totalization Agreement between the US and another country dictates which country will receive Social Security contributions by the international taxpayer. If you are living in a country which has an active Totalization Agreement, you will be required to fill out a series of documents so it’s clear as to where your contributions should be going. If you’re not sure about whether or not your host country has a Totalization Agreement with the United States, talk to a US expat tax professional or look on the IRS website.
If you are living and working abroad and you are paid by an employer based in the United States, you will probably be required to make US Social Security contributions unless you are an agricultural worker, a clergy member, or an enrolled student – in which case, you are exempt from Social Security and Medicare taxes.
If you are a self-employed individual, you will be required to pay into Social Security and Medicare if you earn more than $400 of self-employment income during the tax year. This applies whether your self-employment income is US-sourced or sourced in a foreign country. You may qualify for an exemption or reduction on these taxes in the event of an active tax treaty, but it’s important to remember that any contributions are you are required to make must be calculated before the FEIE is applied.
Will I Be Able to Collect Social Security in a Foreign Country?
With the exception of a few countries, you will be able to collect social security payments while living abroad if you qualify for SSI or SSDI. It’s important to take note that the United States will not send Social Security payments to Cambodia, Cuba, North Korea, Vietnam, or a few select countries which used to part of the Soviet Union. If you qualify for Social Security benefits in both the United States and your host country, you should be able to receive payments from both countries without conflict.
While Social Security benefits are extended into other countries, Medicare benefits are not. If you receive care in a foreign country, you will not be able to charge the bill to your US Medicare plan. If you want to receive healthcare which is covered by Medicare, you will be required to return to the United States for treatment.
What Annual Updates Should I Anticipate?
Many of the reporting thresholds and allowances are adjusted every year to keep up with inflation. For example, the FEIE was $91,500 in 2010, $92,900 in 2011, and $95,100 in 2012. Other amounts which are increased with inflation include the housing deduction, personal deduction, minimum filing thresholds and more. Additionally, new forms are introduced regularly, so keep a vigilant eye out for any new forms which are required.
If you have more questions about US expat taxes or need help preparing a US expat tax return, rely on the professionals at Taxes for Expats.