From sunny Caribbean beaches to charming European villages, the expatriate lifestyle offers numerous settings for relaxation, adventure and a refreshing switch from typical American living. However, understanding your tax obligations is essential as a U.S. citizen or permanent resident living abroad. The United States requires all citizens and green card holders to file tax returns, regardless of location. This guide will offer insights and tips to navigate expat taxes — how they work, when to pay, how to manage them effectively and avoid penalties. Here is what to know.
A financial advisor can help optimize your financial plan to minimize your tax liability.
Do Expats Need to File U.S. Taxes?
The United States requires its citizens and permanent residents to file tax returns with the U.S. Internal Revenue Service (IRS) regardless of where they reside and earn income. Expats don’t get an exception to this rule.
However, expats can be eligible for unique exclusions, deductions or credits to help reduce or eliminate their U.S. tax liability. For example, the Foreign Earned Income Exclusion (FEIE) allows eligible expats to exclude a certain amount of their foreign-earned income from U.S. taxation. Additionally, there are tax treaties in place between the U.S. and some countries that may provide additional benefits and protections.
Remember, even if you don’t owe any U.S. taxes as an expat due to these exclusions or other factors, it’s best still to file informational returns, such as the Report of Foreign Bank and Financial Accounts (FBAR) or the Foreign Account Tax Compliance Act (FATCA) requirements.
Reporting Requirements for Expats
Expats must include these aspects when reporting income and filing U.S. taxes:
Earned income. The IRS taxes every American citizen and permanent resident/green card holder on their income earned anywhere in the world. So, expats aren’t exempt from income taxes, even if they haven’t set foot in the U.S. for decades.
Specifically, you must file a federal U.S. tax return if you’ve earned over $12,950 in 2023 as a single filer. For retirees, the minimum threshold is $14,700. In addition, the threshold for married couples filing jointly is $25,900.
That said, you might have a lower threshold if you fit a specific exception. For example, self-employed expats must file if they earn $400 or more annually, while an expat married to a citizen of a different country and filing separately must file taxes if they earn $5 or more.
Passive income. Earned income comes from working for an employer or generating money as a self-employed worker. On the other hand, passive income comes from sources that require little to no active involvement, such as investments, rental properties, businesses or other ventures where you have limited or no direct involvement. So, expats who receive rental income, dividends from stocks, interest from savings accounts or bonds, royalties from intellectual property or profits from a business in which they’re not actively participating must pay taxes.
Remember, income streams can create different tax implications. For example, the IRS taxes rental income as regular income. Conversely, income from stocks or bonds is subject to capital gains taxes.
Foreign accounts and assets. Expats with financial accounts in other countries adding up to $10,000 or more must file a Foreign Bank Account Report (FBAR). Eligible accounts include savings, checking, investment, pension and business accounts. Remember, FBAR reporting doesn’t go to the IRS. Instead, you’ll fill out Form 114 for FinCen (Financial Crimes Enforcement Network).
In addition, the Foreign Account Tax Compliance Act (FATCA) requires expats to report foreign assets of a certain value when filing taxes, whether or not they file an FBAR. Specifically, foreign assets of $50,000 or more (or $100,000 for married couples) necessitate filing Form 8938 with the IRS.
Warning: failing to file foreign accounts and assets through the forms mentioned above results in a minimum fine of $10,000. Maximum fines for FATCA noncompliance are $50,000, and maximum fines for FBAR noncompliance are $100,000 or 50% of your account value.
Foreign businesses. Likewise, owning 10% or more of a foreign company as an expat obligates you to report it on your taxes. This rule applies to overseas partnerships, LLCs and other business types.
Additional Tax Filing Requirements
The following factors may also influence your tax situation as an expat:
State and local taxes. In addition, your state may require expats to pay taxes if they maintain substantial connections, such as property ownership, investments, voter registration or dependent residents. The specific tax rates and regulations will depend on your state. For instance, Washington recently implemented a 7% tax on capital gains income exceeding $250,000 annually. On the other hand, New Hampshire is eliminating its investment and interest income taxes for 2023.
Moreover, some states, such as Virginia, California, New Mexico and South Carolina, have specific requirements for expats. They will continue collecting taxes from you unless you establish residency in another state or demonstrate that you won’t return to the state at any point in the future. Conversely, certain states, such as Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming do not levy income taxes.
Lastly, while local taxes are unusual throughout the country, some municipalities levy them annually. Therefore, it’s advisable to research the tax obligations of your previous place of residence to preempt penalties for unpaid taxes.
Foreign taxes. The requirement to pay foreign taxes can vary depending on your country of residence. However, the United States has established tax treaties with numerous countries to prevent expats from paying taxes twice on the same dollar.
These treaties mandate expats residing abroad for a relatively short period (typically three to five years) should continue paying social security taxes to the United States but not to their country of residence. Then, if you plan to live abroad past this period, you’ll pay social security taxes to your country of residence but not to the United States.
Regrettably, international tax laws and loopholes don’t guarantee the treaties to work in expats’ favor. So, it’s best to work with a tax professional to see if you can take advantage of the tax treaties in your country.
Tax Filing Deadlines
U.S. federal taxes are due on April 15 each year, and this date also applies to expats. However, the IRS grants expats an automatic 2-month extension, meaning you don’t have to request an extension if you’re late filing. So, expats can file by June 15 every year without incurring penalties. Remember, if the tax due date falls on a Saturday, Sunday or legal holiday, you have until the next business day to file.
In addition, if you fail to file by June 15, you can file an extension request to allow yourself until October 15 to file. To do so, submit Form 4868 to the IRS by June 14. Remember, receiving an extension means paying interest on your unpaid taxes for the luxury of more time.
How to File
Expats can file taxes electronically (E-file) or by mail, with E-filing being the more streamlined option. Remember, mailing documents means physically printing and completing each form. If you file by mail, send your return to the following address:
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215
Remember, filing taxes entails the same steps whether you file as an expatriate or U.S. resident, as follows:
- Calculate your gross income.
- Identify your eligible tax deductions to reduce your taxable income.
- Apply your tax credits after applying deductions.
- Calculate your taxes owed and compare the figure with the total tax payments you made for the applicable tax year. If you paid a higher amount throughout the year, you should get a refund (if your calculations are correct).
- File your tax return with the IRS.
Penalties for Failing to File Expat Taxes
Failing to file or filing late means paying penalties in addition to the taxes owed. Generally, the IRS will charge 5% of the amount due for each month you don’t file. For instance, if you owe $5,000 of income taxes and are five months late, you’ll owe an additional $250 x 5 months = $1,250. This penalty maxes out at 25% of the balance owed. Remember, a granted extension can remove the late charges.
You should also note that all filing requirements are null if you don’t owe taxes. So, if the government owes you a refund, it doesn’t penalize you for filing late. The downside is that you won’t get your refund until you file.
Lastly, your state taxes will impose separate penalties from the IRS. So, it’s best to familiarize yourself with your state tax code to avoid infractions.
Ways to Manage Expat Taxes Effectively
Managing your tax situation is as crucial for expats as for typical U.S. residents. So, use these strategies to minimize your tax burden and avoid penalties:
- Take advantage of deductions. Expats are eligible for tax breaks even though they reside overseas. For example, the Foreign Earned Income Exclusion allows those who live in a foreign country for at least 330 days to exempt some or all of their income from U.S. income taxes. Remember, U.S. government employees usually can’t claim this benefit.
- Stay organized. Keeping all relevant documents, such as bank account statements, business records and proof of citizenship organized is vital to managing your taxes. This way, you will have all the necessary information when you file and ensure you report all eligible income, assets and deductions.
- File promptly. The best way to prevent fees and penalties is to file promptly. Remember, you have an extra two months as an expat to file. However, it’s best to treat the regular April 15 date as your filing date if you can. In addition, self-employed expats must file quarterly estimated tax payments.
Expatriates must comply with U.S. tax laws by filing tax returns with the IRS, regardless of location. Reporting requirements include earned and passive income, foreign financial accounts and assets, foreign businesses and state and local taxes.
Fortunately, there are exclusions and deductions available to reduce your tax liability. First, tax treaties can prevent double taxation, but their benefits vary. Plus, the IRS offers a 2-month filing extension for expats without the need to request one. Remember, expats should seek professional advice to enhance their understanding, comply with tax obligations and maximize deductions and credits.
Tips on Taxes for Expats
- Expats face the challenge of living abroad and managing complex financial circumstances. Fortunately, a financial advisor can help optimize your finances and ensure that you comply with U.S. and foreign tax laws. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Considering the expat lifestyle as a retiree? Here are the cheapest countries where you can retire well.
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