Individual US Tax Returns for Americans Living Abroad

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Individual US Tax Returns for Americans Living Abroad

There is a common misconception that US citizens and green card holders living and working abroad (ex-pats) are no longer subject to US taxes and aren’t required to file US federal returns. This can be a very costly mistake, leading to paying back taxes owed and severe penalties and interest accrued since the taxes should have been filed.

Unlike almost all other countries, the US taxes its citizens and green card holders on their worldwide income, even if earned abroad. This means that as an American ex-pat living abroad, you are subject to the same tax rules as Americans living in the US. You still have a US tax obligation and you must continue to file a US federal return and pay taxes if your worldwide income exceeds the annual minimum filing threshold for your filing status, as follows:

  • Single filers: $12,400
  • Married Filing Jointly filers: $24,800
  • Married Filing Separately filers: $5
  • Head of Household filers: $18,650
  • Self-Employed filers: $400

Even if you never set foot in the US during the year and earned all of your income abroad, you still must file a US return and pay taxes on your US taxable income if your income exceeds the minimum filing threshold. And this includes not only your wage or self-employment income but also interest, dividends, capital gains and rental income, regardless of where the income was sourced—US or foreign.

It is also important to know that the IRS requires you to report all of your foreign financial accounts and assets if they exceed a certain threshold amount. The penalties for failing to do that are severe—up to $10,000 per year, even if you are unaware of the filing requirement. Finally, please be aware that you may still have a requirement to file a state tax return, depending on which state you lived in before moving overseas and how extensively you keep ties to your home state while you are abroad.

A significant complication for US ex-pats living and working abroad is the potential risk of getting doubly taxed on their earned income – both by the US and their country of residence. This is particularly true for ex-pats who live continuously on a long-term basis in a certain foreign country and qualify to be taxed as residents by that country. Fortunately, the US has several provisions to help US ex-pats avoid double taxation of their foreign earned income: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

Foreign Earned Income Exclusion (FEIE)

Ex-pats may exclude up to $107,600 of their foreign earned income in 2020 from US taxation using the FEIE. The exclusion rises to $108,700 in 2021.

Foreign Tax Credit (FTC)

To the extent that ex-pats have not already had their foreign earned income excluded via the FEIE, they may be able to reduce their US tax liability further by claiming a credit for their foreign taxes paid or accrued on certain types of income, including earned income and passive income.

Sounds complicated and confusing?  It is – but here at Universal Tax Professionals, our team of CPAs and IRS Enrolled Agents specialize exclusively in US ex-pat taxes and we are ready to handle all of your US filing obligations and help minimize your worldwide tax burden, no matter where in the world you are.  Contact us today to get started!