2024 US Tax Guide for Americans Living Abroad

Written by: Josh Katz, CPA

Living abroad as a US citizen is a rewarding experience, offering diverse cultures, new opportunities, and a broader perspective on the world. However, amidst the excitement of international living, American expats must stay well-informed about their financial responsibilities, especially their obligation to file US taxes.

At Universal Tax Professionals, we understand the unique challenges expats face when managing their US taxes while living in another country. Our mission is to help you understand the process and provide tax advice for your situation to ensure you remain compliant with the latest tax regulations. If you’re living the expat life, don’t worry! Our extensive list of US expat tax services is tailor-made to help Americans like you smoothly navigate those US tax obligations while living abroad.

We’ll explore the important 2024 US tax updates that expats must be aware of when preparing their 2023 US tax returns. From changes in tax thresholds to reporting requirements, we’ll break down everything you need to know to stay on top of your tax obligations. Our team is here to support you every step of the way so you can focus on enjoying your overseas journey without the added stress of US tax compliance.

Do Americans Living Abroad Pay US Taxes?

This is the most common question that people ask when they move abroad. The short answer is, not necessarily, but almost all Americans living abroad must file their US taxes. Filing US taxes is not the same as paying US taxes.

The United States has a unique taxation system that follows its citizens wherever they go, regardless of residency. Even if you have established a life in a foreign country, you must file annual federal income tax returns with the Internal Revenue Service (IRS) and report your worldwide income whenever your income exceeds the IRS filing threshold.

2023 IRS Filing Threshold

The IRS filing threshold refers to the minimum income level at which individuals are required to file a federal income tax return. As an American expat, you will need to file a 2023 US tax return in 2024 if your income exceeds the following thresholds:

  • Single filers: $13,850
  • Married Filing Jointly filers: $27,700
  • Married Filing Separately filers: $5
  • Head of Household filers: $20,800
  • Self-Employed filers: $400

It’s important to note that these figures represent all income sources, such as wages, self-employment income, rental income, dividends, and more. Additionally, certain circumstances, such as special deductions or tax credits, can affect the determination of whether a tax return needs to be filed.

It’s crucial to highlight that when determining whether your total gross income surpasses the IRS filing threshold, you should convert your income into US dollars. For precise conversion, it is recommended to utilize the IRS exchange rate.

How Much Tax Do You Pay as a US Expat?

The tax liability for US expats depends on various factors, including income level, filing status, and applicable deductions.

The United States employs a progressive tax system, meaning that individuals with higher incomes face higher tax rates on the portion of income within each tax bracket. There are seven tax brackets with corresponding marginal tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Contrary to a common misconception, your entire income is not taxed at your highest marginal rate. Instead, each portion of your income falls into a specific tax bracket, and you pay the corresponding rate on that portion.

Calculating your tax liability involves applying the marginal tax rates to different portions of your income. Here’s a simplified example:

  • Let’s say your taxable income is $50,000 as a single filer.
  • The first $11,000 is taxed at 10%.
  • The income between $11,000 and $44,725 is taxed at 12%.
  • The remaining income, $44,725 to $50,000, is taxed at 22%.

Your tax liability would be calculated by applying the corresponding rates to each income segment.

2024 US Tax Deductions and Credits

Another important concept that American expats need to know when dealing with their US taxes is the applicable deductions and credits they can claim on their US tax returns.

Tax Year 2023 Standard Deduction

The standard deduction is a fixed-dollar amount that reduces the taxpayer’s adjusted gross income (AGI) and, consequently, their taxable income. The standard deduction amounts for Tax Year 2023 have increased across various filing statuses as compared to the prior year, providing taxpayers with additional deductions to reduce their taxable income.

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Itemized Deduction

Itemizing deductions involves listing individual expenses that qualify for deduction, such as mortgage interest, medical expenses, state and local taxes paid, and charitable contributions. If the total of these itemized deductions exceeds the standard deduction, choosing this route may be financially advantageous.

Child Tax Credit

The Child Tax Credit serves as a valuable financial aid for families with eligible children. For the tax year 2023, the credit amounts to a maximum of $2,000 per qualifying child under 17 years old. To be eligible, you need to have earned income of at least $2,500. However, if your modified adjusted gross income (MAGI) exceeds $200,000 ($400,000 for those married and filing jointly), the credit starts to decrease. Specifically, it reduces by $50 for every $1,000 your income exceeds the specified threshold.

In cases where you qualify for the Child Tax Credit but can’t fully utilize it due to owing little or no taxes, you might still receive a partial refund of up to $1,600 through the Additional Child Tax Credit. It’s important to note that if you are utilizing the foreign earned income exclusion to exclude your foreign earned income from US taxation, you can still benefit from the Child Tax Credit, but the $1,600 refund available via the Additional Child Tax Credit for 2023 cannot be claimed.

Education Credits

American expats pursuing education or supporting the education of their dependents may be eligible for education-related tax credits. The American Opportunity Credit and the Lifetime Learning Credit are examples of credits that can directly reduce tax liability for qualifying education expenses.

Do US Expats Need to Declare Foreign Income in the US?

Yes, US expats must declare their foreign income to the IRS, even if their income is solely derived from foreign sources and they have no income in the United States. This obligation is rooted in the concept of citizenship-based taxation. Whether employed or residing outside the US, the requirement persists as long as you maintain US citizenship.

Types of Foreign Income that Need to be Declared

  • Employment Income: Salaries, wages, bonuses, and any other compensation earned from working abroad must be reported.

  • Self-Employment Income: If you are self-employed and generate income from your business activities outside the US, this income must be declared.

  • Rental Income: Income earned from renting out properties, whether residential or commercial.

  • Investment Income: This includes dividends, interest, and capital gains from investments held outside the US.
  • Foreign Pensions: Income received from foreign pension plans or retirement accounts must be declared.

  • Foreign Social Security Benefits: If you receive social security benefits from a foreign country, this income needs to be reported.

  • Business Income: Income generated from any business activities conducted outside the US must be declared.

  • Other Income Sources: Any other foreign sources of income received, such as royalties, alimony, or any miscellaneous income, must be reported.

Types of Forms for Reporting Your Foreign income as an American Living Abroad

Yes, US expats must declare their foreign income to the IRS, even if their income is solely derived from foreign sources and they have no income in the United States. This obligation is rooted in the concept of citizenship-based taxation. Whether employed or residing outside the US, the requirement persists as long as you maintain US citizenship.

  • Form 1040 (US Individual Income Tax Return)

    All US citizens, including expatriates, must file Form 1040 as their individual income tax return. This form includes sections for reporting various types of income.

  • Schedule C (Profit or Loss from Business)

    Schedule C reports income or loss from a business or profession, and it is a key form for self-employed individuals, freelancers, and small business owners.

  • Schedule E (Supplemental Income and Loss)

    Schedule E reports supplemental income and loss, including income from rental property, royalties, partnerships, S corporations, estates, and trusts.

  • Form 8938 (Statement of Specified Foreign Financial Assets)

    This form reports specified foreign financial assets, such as bank accounts, investment accounts, and certain other financial instruments, if their total value exceeds certain thresholds.

  • FinCEN Form 114 (Report of Foreign Bank and Financial Accounts – FBAR)

    If you have foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, you must file an FBAR.

Form 1040

How Much Foreign Income is Tax-Free in the US?

At the beginning of this article, we discussed how filing taxes in the US and paying taxes are two different things. Usually, Americans living abroad still have to file US taxes, but only a few have to pay them. Why is that? Well, even though the US tax system is connected to citizenship, there are available exclusions and agreements with other countries that can help Americans living abroad handle their US taxes without having to pay a lot.

One of the provisions in the US tax code that allow individual taxpayers to exclude a certain amount of their foreign-earned income from US taxation is called the Foreign Earned Income Exclusion (FEIE).

Foreign Earned Income Exclusion (FEIE)

For the 2023 tax year, the maximum exclusion amount under the FEIE is $120,000 per qualifying individual. This means that an eligible taxpayer can exclude up to $120,000 of their foreign-earned income from their US gross income. If you are married to a US citizen or green card holder and will be filing jointly, you can exclude up to $240,000 of your foreign income on your 2023 US tax return. It’s important to note that this exclusion amount is subject to annual adjustments for inflation.

In addition to the FEIE, eligible individuals may qualify for a Foreign Housing Exclusion or Deduction, which can further reduce their taxable income by excluding or deducting certain foreign housing-related expenses.

Source: IRS.gov

Foreign Housing Exclusion

The Foreign Housing Exclusion helps mitigate the financial burden of living in a foreign country, where housing costs can often be much higher than in the United States. US citizens are allowed to exclude certain housing expenses from their taxable income.

The Foreign Housing Exclusion amount is based on your actual housing expenses abroad, up to 30% of the FEIE, minus a base housing amount of 16% of the FEIE. Since the FEIE for the 2023 tax year is $120,000, the maximum standard exclusion would be $16,800.

Self-employed expats do not qualify for the Foreign Housing Exclusion; however, they can claim the Foreign Housing Deduction, which is calculated similarly to the Foreign Housing Exclusion.

Remember that the Foreign Housing Exclusion is separate from the Foreign Earned Income Exclusion. Eligible taxpayers can claim both the Foreign Housing Exclusion and the Foreign Earned Income Exclusion on their 2023 US tax return.

How to Qualify for the Foreign Earned Income Exclusion and the Foreign Housing Exclusion?

Qualifying for the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion involves meeting specific Internal Revenue Service (IRS) criteria.

Physical Presence Test

  • To meet this test, an individual must be physically present in a foreign country or countries for at least 330 full days during any consecutive 12-month period.
  • The 330 days do not need to be consecutive, but must add up to 330 within a 12-month period.
  • The 12-month period can start at any time, as long as it consists of consecutive months.

Bona Fide Residence Test

  • To meet this test, an individual must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
  • Bona fide residence is determined by factors such as the length and nature of stay, intention to make the foreign country home, and the establishment of personal and economic ties.
  • Individuals who are bona fide residents can qualify for the FEIE even if they do not meet the Physical Presence Test.

Keep in mind that the foreign-earned income must be from a legitimate job or self-employment. Income derived from investments, interest, or dividends does not qualify for the FEIE.

The Foreign Housing Exclusion is connected to the FEIE, and to be eligible, you must also meet either the Physical Presence Test or the Bona Fide Residence Test. Additionally, you need to have qualifying expenses, such as rent, utilities, real and personal property insurance, nonrefundable property taxes, and fees for securing a lease.

Both the FEIE and the Foreign Housing Exclusion are reported on Form 2555 and must be attached to your 2023 Form 1040 when you submit your tax return to the IRS.

Do US Citizens Living Abroad Pay Double Taxes?

US citizens living abroad are potentially subject to double taxation because they may have to pay taxes on their income both in the country where they earn it and in the United States. Nevertheless, due to various mechanisms in place, US citizens can avoid paying double taxes.

Income Tax Treaties

Income tax treaties are important in mitigating the risk of double taxation for Americans living abroad.

US Income Tax Treaty

A fundamental aspect of income tax treaties is allocating taxing rights over specific types of income. These treaties define which country has the primary right to tax certain income categories, such as dividends, interest, royalties, and capital gains. 

The agreed-upon rules help ensure that income is taxed only once, and in the country where it is most appropriately attributed.

Here are some countries that have income tax treaties with the US. Please visit the IRS website for the full list.

  • Ireland
  • Italy
  • Israel
  • Japan
  • Luxembourg
  • Mexico
  • New Zealand
  • Norway

Foreign Tax Credits (FTC)

The Foreign Tax Credit (FTC) is a tax provision that helps alleviate the burden of double taxation on income earned in foreign jurisdictions.

The primary objective of the FTC is to provide relief to taxpayers who have paid income taxes to a foreign government on the same income subject to taxation in the United States. This credit is not limited to individuals; corporations and other entities engaged in international business activities can also benefit from the FTC. By allowing a dollar-for-dollar reduction of the US tax liability for foreign taxes paid, the FTC ensures that taxpayers are not burdened by the complexities of navigating different tax systems.

To claim the FTC, individual taxpayers must complete Form 1116, which is the conduit for calculating the credit. This form requires detailed information about the foreign income, the foreign taxes paid, and the specific categories of income eligible for the credit.

While Form 1116 presents a more intricate process as compared to Form 2555, it offers distinct advantages that can prove more advantageous, depending on your specific tax circumstances.

Utilizing the FTC allows you to carry forward excess credits to future years. This strategic approach ensures that, in the event of having US tax liabilities, you have available credits to offset them. Additionally, opting for FTC enables you to claim the refundable portion of the Child Tax Credit, a benefit not permitted by the Foreign Earned Income Exclusion (FEIE).

It is important to note that leveraging the FTC requires fulfilling a prerequisite – paying taxes to the foreign country. If you find yourself working in a nation with a high tax rate, employing FTC becomes more advantageous. However, if you reside in a country with a lower tax rate or in a tax haven country, utilizing the FEIE may be a more beneficial strategy.

2024 US Tax Deadlines and Extensions

These are the important dates to remember when preparing your 2023 US tax return and FBAR:

March 15, 2024

  • Filing Deadline for US Corporations: Corporate tax returns (Form 1120, 1120-A, 1120-S) and Partnership tax returns (Form 1065) must be filed by March 15, 2024.
  • Filing Deadline for Form 3520-A for US Owners of Foreign Trusts: US owners of foreign trusts must also file Form 3520-A by March 15, 2024.

    April 15, 2024

    • Filing Deadline for Individual US Tax Returns and FBARs: The primary deadline for most individual US taxpayers to file their 2023 tax returns falls on April 15, 2024. This date also marks the deadline for filing Foreign Bank Account Reports (FBARs), for those with financial interests in foreign accounts.
    • Deadline for Paying US Taxes: Any taxes owed to the US government must be paid by April 15, 2024, to avoid the imposition of penalties and interest by the IRS.

    June 17 2024

    • Filing Deadline for Americans Living Abroad: Americans living abroad have an extended deadline of June 17, 2024, to file their tax returns.
    • Last Day for Expats to File an Extension: June 17 is also the final day for American expats to file an extension, if additional time is needed to complete their tax filings.

    October 15, 2024

    • Filing Deadline with Extension: Individuals who filed for an extension have until October 15, 2024, to file their completed tax returns and FBARs.

    What if I'm behind on My US Taxes?

    There’s a widespread misconception that Americans living abroad no longer need to file their US taxes, especially if they have no income from US sources. However, as previously explained, American expats must still file their US tax return once they exceed the IRS filing threshold.

    Unfortunately, due to this misunderstanding, numerous American expats have overlooked filing their US taxes for an extended period or since relocating overseas. If you discover yourself in this situation, it’s crucial to take action to rectify the matter promptly.

    IRS Streamlined Amnesty Program

    The IRS Streamlined Filing Compliance Procedures offer a helpful avenue for catching up on your US taxes without facing excessive penalties. This program is designed to assist taxpayers who have not willfully neglected their tax obligations but have fallen behind due to oversight or misunderstanding of the filing requirements.

    Under these procedures, eligible taxpayers can file delinquent tax returns for the past three years, along with the required Foreign Bank and Financial Accounts (FBAR) reports for the past six years. One notable benefit of the Streamlined Program is the elimination of penalties.

    It’s crucial to note that to qualify for the Streamlined Filing Compliance Procedures, taxpayers must certify that their failure to report income, pay taxes, and submit required information returns was not willful. Additionally, individuals must demonstrate their eligibility by meeting specific non-residency requirements for the Streamlined Foreign Offshore Procedures.

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    2024 US Tax Help for Americans Living Abroad

    Universal Tax Professionals is here to assist you if you need additional information about US taxes or need help preparing your 2023 US tax return. Our team of accountants are experts in international taxation and have successfully helped clients with diverse tax scenarios worldwide.