Filing US taxes as an American living abroad can be time-consuming, confusing and downright frustrating. But it doesn’t have to be! We believe that ‘knowledge is power.’ The first step to preparing your taxes is gathering your tax documents—then it’s time to complete the forms! But which ones? Here are the 5 most common tax forms US expats need to file.
This is your main tax form, just as it is for US residents. Here you report all your foreign and domestic income (including wages, bonuses, Social Security benefits and dividends, interest, etc.). Some expats will need to complete some additional schedules along with their 1040 to report foreign bank accounts, self-employment expenses or deductible expenses. These forms are:
- Schedule A
Report deductible expenses, such as moving and travel expenses and certain foreign taxes paid.
- Schedule B
Part III of Schedule B is where you must report foreign trusts and foreign bank accounts (ie FBAR and FATCA).
- Schedule C
Self-employed expats will need to file a Schedule C, just like those living in the US. Report your gains/losses and deductible business expenses.
Form 2555 & 2555- EZ
Have you heard about the Foreign Earned Income Exclusion (FEIE)? This is one of the best ways to reduce or eliminate your US tax liability. If you qualify for the FEIE, it is not ‘automatic’—you must elect it using Form 2555 or 2555-EZ.
When you qualify as an expat via one of two residency tests, you can exclude up to $99,200 of earned income in 2014 from US income tax. In addition, you may be able to use the Foreign Housing Exclusion to exclude certain foreign housing expenses from US taxation.
The Physical Presence test (which is the most popular way expats qualify) requires that you be physically present in a foreign country for 330 of any 365-day period. The Bona Fide Residence test requires you to live in a foreign country for at least one year and have no intentions of permanently returning to the US (so overseas contractors or those on assignment will not qualify this way).
You can only use Form 2555-EZ (the more streamlined version of the form) if you are not claiming the Foreign Housing Exclusion.
The Foreign Tax Credit (FTC) isn’t as well known as the Foreign Earned Income Exclusion, but it’s definitely an excellent way for some expats to save on their US expat taxes. The FTC is claimed via Form 1116, and is a dollar-for-dollar tax credit for the taxes you pay to a foreign country.
Because UK tax rates are fairly high, many US expats in the UK choose the FTC to offset US taxes. It can be used by itself or in conjunction with the FEIE. But remember that you cannot take foreign tax credits on income you have already excluded with the FEIE.
For example, if you have $130,000 in foreign income and choose to offset $99,200 with the FEIE, then you can only use the FTC to offset the taxes you paid to the UK on the remaining $30,800 of income.
This prevents ‘double-dipping’ in the eyes of the IRS!
FBAR Form FinCEN 114
FBAR (Foreign Bank Account Report) is part of the US initiative to thwart tax cheats hiding money in overseas accounts. FBAR must be filed if your foreign bank account balances exceed $10,000 at any point during the tax year. This is an aggregate balance so if you had $4,000 in one account and $9,000 in another, both accounts need to be reported.
FinCEN 114 is not filed with the IRS—it goes to the Department of the US Treasury. It must be e-filed through the BSA e-filing system by June 30 each year and no extensions are available.
FATCA Form 8938
Expats must file Form 8938 if the value of their specified foreign financial assets exceed certain thresholds. The thresholds for those living overseas are:
- Single filers: $200,000 on the last day of the tax year or $300,000 at any point during the year.
- Married joint filers: $400,000 on the last day of the tax year or $600,000 at any point during the year.
But what are specified foreign financial assets? Generally, these types of assets include stocks or securities issued by a foreign corporation, foreign bank accounts or a brokerage account held with a broker dealer. Your home is not a reportable asset.
Click here to learn more about the differences between FATCA and FBAR. You may need to file FBAR, FATCA, both or neither!
There are other forms you may need to file as a US expat in the UK but if you are unsure about what to file or which credits or deductions you qualify for, please consult an expat tax professional.
This post was written by David McKeegan, Co-Founder of Greenback Expat Tax Services. Greenback specializes in the expert preparation of US taxes and our UK Chartered Accountant is available to prepare your UK self-assessment tax return. If you would like to get started with Greenback, please contact us today or click here to get started!