February 23, 2022|US foreign tax
For Americans living abroad, the US expat tax rules can be overwhelming and confusing. Worse yet, failing to submit the file correctly can result in significant penalties.
However, with strategic preparation and proper filing, there are huge tax benefits designed specifically for American expatriates.
we created thisUS Expat Tax Guideto explain taxes for US citizens abroad. Includes tax rates, reporting thresholds, limit amounts, and more for the 2021 tax year.
Here we cover:
- presentation thresholds
- Tax benefits for expatriates
- Exclusion of income from work abroad
- Formulate 2555
- Proof of physical presence
- Bona fide residency verification
- Foreign Housing Ban
- foreign tax credit
- freelance abroad
- tax treaty
- Foreign Bank Accounts
- Other foreign assets
- State taxes
- tax deadlines
- How to register from abroad
Of course, such a guide can only provide an overview and is not a substitute for personal advice from an expatriate tax advisor.
If you have additional questions or want to get started with your taxes, you canmake an appointment for a consultationwith us.
1. Expats Must File US Taxes: Filing Thresholds
Overseas Americans must file a US tax return when they meet the income limits.
Even if they live abroad and do not owe taxes, US citizens and green card holders must file a US tax return if their income is over the threshold. This also applies todigital nomads.
HeThresholds for fiscal year 2021Son:
|login status||gross income|
|single (under 65)||12.550 $|
|Married couples filing jointly (under age 65)||25.100 $|
|Register married persons separately (any age)||$5|
|Head of household (under 65 years of age)||18.800 $|
If you are self-employed and you had at least $400 in self-employment income, you must also apply. In addition, there are other circumstances in which you must file a tax return even if your income is below these thresholds.
2. Tax benefits for US expats
The good news is that Americans living abroad can avoid double taxation and even reduce their US taxes.
Taxes for expatriates differ in many ways from tax returns you filed while living in the United States.additional requirements for expatriates, there are also many tax benefits for Americans living abroad, such as:
- Excluding tax revenues with theExclusion of income from work abroad (FEIE)
- claim to theForeign Housing Banor deduction to reduce living expenses
- apply theForeign Tax Credit (FTC)to offset taxes paid to other countries
- applicable useTax treaty benefitsexempt other income from US taxes
These exclusions, deductions, and credits allow many US expatriates to reduce or even eliminate their US tax burden.
More on FEIE, Housing Foreclosure, FTC, and Tax Treaties below.
3. Exclusion of income from work abroad (FEIE)
HeExclusion of income from work abroadit is one of the most beneficial exclusions for many Americans abroad. It can result in big tax savings. (However, some expats benefit more from the overseas tax credit. More on that later.)
The FEIE allows US expatriates to exempt up to $108,700 of their income from US income tax in 2021. In 2020, the maximum was $107,600.
The IRS adjusts this amount for inflation each year, although Trump's 2017 tax reform changed the inflation rate to a slower growth rate.
This exclusion only applies to income earned abroad. Income earned in the United States is still subject to income tax. You also cannot claim the FEIE for passive income such as interest, dividends, rental income, etc.
4. Formulate 2555
Americans working abroad do not automatically receive the foreign earned income exclusion. Instead, they must claim it.Formulate 2555as part of your US tax return. Also, they must meet IRS requirements to qualify.
To qualify for the FEIE it is necessary to pass one of the following two tests:
- Physical presence testst – stay abroad for a minimum number of days
- Proof of bona fide residency– Have a home and strong ties in a foreign country
5. Proof of physical presence
Expats qualify for the FEIE belowProof of physical presence(PPT) if they stay abroad or abroad for at least 330 days in a 365-day period.
This requirement is often simplified to "no more than 35 days in the US." However, travel days to and from the US and time spent in or over international waters count as US days.
Fortunately, the 365 day period does not have to be the calendar year. It can be any period beginning or ending in the fiscal year. For example, you could leave the US on July 1 and return on July 1 of the following year and be abroad for a full 330 days during that period.
This allows Americans abroad to select a time period that maximizes their time abroad and therefore the amount of exclusion they can claim under the FEIE.
New expats often request a deadline extension to October 15. This gives them more time to apply for the FEIE. More about the deadlines and a special regulation for expatriates later.
6. Proof of bona fide residency
Being a true resident of a foreign country is another way to qualify for the FEIE. Although the PPT is clear - the days count - theBona fide residency verificationit's pretty subjective.
To qualify, you must be a resident of a foreign country and have strong ties there. No single bond or bond list determines your residency status. Rather, a collection of strong connections abroad and no connections in the US will help qualify. Strong ties include:
- Long-term lease or home ownership
- family members there
- health insurance
- Local bank accounts (remember you may need to report to the FBAR)
- gym membership
- Church membership or other social commitment
Bona Fide residency offers more flexibility when it comes to spending time in the United States.
7. Foreign Housing Exclusions and Reimbursable Expenses
Americans living abroad who claim the FEIE can also use itForeign Housing Banor deduction to save on eligible housing costs. This helps offset the higher cost of living in many other countries.
In order to qualify for the exclusion or deduction of housing abroad, you must qualify for and use the FEIE. Like the FEIE, the exclusion or deduction of housing is requested through Model 2555.
In most other countries, US taxpayers can deduct or exclude between $30,000 and $50,000 in housing expenses. The exact amount varies depending on where you live. the tax officeupdate limitsevery year.
Expensive cities have even higher exclusion limits. The city with the highest maximum exclusion is Hong Kong with $114,300. Americans living in Singapore can deduct up to $84,100 in living expenses. And up to $103,800 in Geneva by 2021.
Eligible expenses must be reasonable living expenses incurred by you, your spouse or dependents living abroad.
Expenses such as personal property insurance, rental fees, furniture rentals, parking space rentals, and repairs qualify for the foreign housing exclusion or deduction.
Housing costs that are nonessential or considered extravagant do not qualify for the foreign housing exclusion or deduction. Mortgage payments, expenses related to housework, television service, internet, telephone and furniture purchase do not qualify for exclusion or deduction.
8. Foreign Tax Credit (FTC)
Heforeign tax credit(FTC) is another popular option for expatriate American taxpayers. The FTC gives expatriates a dollar-for-dollar credit for taxes paid in another country. This can offset or even eliminate US government taxes.
You cannot use the FTC for income that you have already excluded with the FEIE.
However, you can apply the foreign tax credit to any income that exceeds the FEIE threshold or was not originally excluded.
In countries with higher tax rates than the US, it can often make sense to use the foreign tax credit instead of the FEIE.
You can even transfer unused tax credits from a high tax jurisdiction to a later date if you move to a low tax jurisdiction.Talk to an experienced expat tax adviserto assess what is best for your situation.
9. Taxes for self-employed abroad
Self-employed expats should know that the FEIE only excludes income from income tax. you still have topay self-employment taxon your net earnings.
Self-employment tax covers Social Security and Medicare taxes and is 15.3% for the first $142,800 of income.
An additional 0.9% Medicare tax may also apply if your net income from self-employment is more than $200,000 if you file an individual application, or $250,000 if you file a joint application.
On the other hand, if your country of residence has a social security sums agreement with the United States, then you can choose which country you want to contribute to based on your personal and fiscal situation. For example, in Italy you can choose to pay the US self-employment tax of 15% or the Italian equivalent of 25%.
Without a totalization agreement, you may have to pay on the systems of both countries.
10. Tax Treaties
HeThe United States has tax treatieswith over 60 countries including most (but not all) of the popular expat destinations.
The list of countries with income tax treaties includes Australia, Canada, most of Western Europe, Mexico, China, Japan, and even as far away as Kyrgyzstan. However, Singapore, Hong Kong, the United Arab Emirates, Brazil, and Colombia do not currently have a tax treaty with the United States.
Tax treaties may provide exemptions or reduced rates for certain types of income, including superannuation/retirement plans, and reduced withholding rates for passive income, such as dividends and interest.
An experienced US expatriate tax advisor will ensure that all applicable treaty benefits are applied to your US tax return.
11. FBAR Foreign Bank Account Reporting (FinCen 114)
HeForeign Bank Account Report (FBAR)it is a requirement for most Americans abroad.
If the total value of your foreign financial accounts was more than $10,000 at any time during the calendar year, you must report all of your foreign accounts. The combined value includes all accounts in which you have a financial interest or signatory authority.
The foreign bank account report is submitted to the Ministry of Finance electronically using FinCen Form 114.
Make sure you understand the specific requirements and submit them correctly. Failure to disclose all relevant accounts can result in heavy fines.
The FBAR expires on April 15, but the government grants an automatic extension until October 15.
12. Form 8938 for other financial investments abroad
If you have other foreign financial assets such as mutual funds, foreign annuities, stocks, bonds, loans, and other investments you haveyou may also need to submit Form 8938(Video). This form is sent with your tax return.
The threshold for Form 8938 is higher than the FBAR and varies by filing status.
A US expatriate filing a joint return must file Form 8938 if the value of the foreign assets exceeds:
- $400,000 on the last day of the fiscal year or
- $600,000 at any time of the year.
Form 8938 is required for US expatriate registration as an individual if the value of the foreign property exceeds:
- $200,000 on the last day of the fiscal year or
- $300,000 at any time during the year.
Note that the Form 8938 filing thresholds are significantly lower for individuals residing in the United States.
13. Government taxes
As an American abroad, you may still need to do thispay state taxesto your previous country of residence. Your obligations depend on the respective federal state.
The easiest states for US citizens to study abroad are those that do not have income taxes. These include Florida, Nevada, Texas, and Washington, among others.
Some other states have a neutral stance towards expatriates. These countries will generally no longer consider you a tax resident after you have been away for a period of time. Some of these states may also require you to provide documentation proving your new residence. Fortunately, you probably won't run into many obstacles in most neutral states.
The most difficult and aggressive states are California, South Carolina, New Mexico and Virginia. Problems have also been reported with Massachusetts, Maryland and North Carolina.
It is important to know your state's requirements. If you stop filing and then return to the state, the state may notice the gap in your records. If you cannot show that you were a resident elsewhere during those years, you may be required to file and pay taxes for those missing years.
14. Expat Tax Return Details
Usually expats get oneautomatic extension for 2 monthssubmit and pay. If you are abroad during the regular April tax deadline, you must file your U.S. tax return from15. June 2022.
If you need more time to perhaps qualify for the FEIE, you can request an extensionOctober the 17th.
However, taxes owed must be paid by July 15 to avoid interest and late fees.
In certain circumstances, a further extension to December 15 may be possible at the discretion of the IRS.
Also keep in mind estimated tax due dates if you're self-employed or don't have automatic tax withholding.
15. How to File Your US Expat Taxes from Abroad
Life abroad can be exciting, but also complicated. Your US tax return will also become more complicated. However, expatriate US taxpayers can reap potentially significant tax benefits by knowing what tax rules apply to them.
This US Expat Tax Guide provides an overview of the major tax implications of living abroad as a US citizen. Of course, every situation is unique. We offer US tax advice for expatriates to discuss your specific situation and tax needs, and to answer your questions.
For help from our experts,make an appointment for a consultation.