U.S. tax rules are unfortunately particularly complicated. Special rules apply to Americans living abroad, which can make US expat taxes even more difficult to maneuver! This article shares our top 5 “must-knows” for Americans living abroad.
#1: All US citizens are required to file a tax return to the US regardless of where in the world they live or work.
All US citizens—whether they live in the UK, Germany, Japan, or anywhere else—are required to file US expat taxes (and report their foreign bank accounts) if they are above the gross income filing requirements and bank account reporting thresholds set by the IRS. For instance, if you are married filing jointly and both under age 65 and your 2011 gross income is more than $19,500 you have to file a 2011 U.S. tax return. If you have more than $10,000 in foreign bank accounts at any time during the year, you have to report those as well.
Although this can mean that expats are burdened by dual taxation because their income gets taxed twice (once by their host country and then by the US), to reduce this burden, the IRS offers expats numerous credits and deductions on their US expat taxes that help protect against this. There is a dual taxation in place between the UK and the US that helps protect Americans living in the UK against dual taxation.
#2: Expats can apply for special tax credits and deductions.
Fortunately, expats are eligible for various credits and deductions that help ease the burden of double taxation. The most important is the foreign earned income exclusion. This is claimed on Form 2555 and essentially protects a large amount (and in some cases, the total amount) of your foreign earned income from US taxation. For the 2011 tax year, the foreign earned income exclusion allowed expats to exclude up to $92,900 of their foreign earned income on their expatriate tax return. The second most important credit, maybe the most important for individuals living in the UK, is the foreign tax credit. This is claimed on Form 1116 and gives expats a tax credit for the taxes they pay to foreign governments. Expats should note that to claim either of these, they must pass either the physical presence or bona fide residence test. The tests are used to determine whether or not an “expat” is truly an expat in the eyes of the IRS. A bona fide resident lives and works in the foreign country for a period that includes an entire tax year and had no plans to return to the US. The physical presence test is met by being present in the foreign country for at least 330 days during any consecutive 12 month period.
#3: Some expats might have to file a state tax return.
Depending on their state of residence prior to moving abroad, expats may be required to file annual state tax returns even years after they have left the US. Unique individual state regulations are important for soon-to-be expats to consider, because severing ties with a state is best done at least six months before moving abroad. Seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—have no income tax whatsoever. New Hampshire and Tennessee, similarly, only tax interest in dividend income. California, New Mexico, South Carolina, or Virginia however make it extremely difficult to terminate residency. The remaining 37 states are neither favorable nor unfavorable and will generally consider an expat a non-resident after he or she spends a certain amount of time living elsewhere. Above all, soon-to-be expats should sever as many state ties as possible including mortgages, bank accounts, voter registrations and even library cards if they want to avoid needing to file a state tax return.
#4: You Will Likely Need to File Additional Forms to Declare your Foreign Bank Accounts
There are two forms that many Americans living abroad need to file to declare their foreign bank accounts. First, the FBAR (form TD F 90.22-1) is required for expats whose foreign bank accounts have an aggregate balance of or above $10,000 at any point during the year. This is filed with the US Treasure, not the IRS and must be received by the Treasury by June 30th each year – there are no extensions. The second, Form 8938, is filed as part of your US expat tax return and has higher thresholds (above $200,000, for people living abroad) and slightly different requirements as to what counts as a foreign financial asset.
#5: Expats have lots of tax deadlines
The tax deadline for all Americans is April 15th, but Americans living abroad have an extended deadline to June 15th to file their US expat taxes. This means that expats have an extra two months to file. If you owe taxes, you will be charged interest as of the April 15th deadline however, so it pays to file as early as you can. Extensions to October 15th can be requested and are quite common for people who live in countries where the tax deadline does not tie to the calendar year, such as the UK. The last deadline you should know about is June 30th—this is the day that the Report of Foreign Bank and Financial Accounts (FBAR or TDF 90-22-1) must be filed with the US Treasury Department (no extensions or exceptions- and the form must be received by June 30th, not simply postmarked).
This article was written by David McKeegan, President, Greenback Expat Tax Services. All information is correct as of the time this article was written (June 2012). However, due to the complexity of the US tax and foreign bank account reporting requirements, we always recommend you consult with a tax professional about your particular situation before making any decisions.
About Greenback Expat Tax Services
Greenback Expat Tax Services specializes in the preparation of US expat taxes for Americans living abroad. Greenback offers flat-fee pricing, a simple, hassle-free process, and CPAs and Enrolled Agents with decades of experience in the field of expat tax preparation. As part of our tax preparation services, we can also help Americans living abroad to file form 8938 and the FBAR. For more information and to download a free guide to US expat taxes, visit www.greenbacktaxservices.com