For Americans living abroad, the rules for US taxes can be overwhelming and confusing and if you fail to file correctly, it can result in significant penalties or even legal repercussions.
Nonetheless, when strategically prepared and filed correctly, there are huge benefits designed specifically for US expats.
We have created this Guide to US Expat Taxes to explain taxation for US citizens abroad. It includes 2020 tax rates, filing thresholds, exclusion amounts, and more. We also updated it with the latest deadline extensions due to the coronavirus.
Americans living abroad must file a US tax return if they meet certain income thresholds
Even when living abroad and even if they don’t owe any tax, US citizens and Green Card holders must file a US tax return if they meet the filing thresholds.
The 2019 tax year thresholds are:
|Filing Status||Gross income|
|Single (under age 65)||$12,200|
|Married filing jointly (under age 65)||$24,400|
|Married filing separately (any age)||$5|
|Head of household (under age 65)||$18,350|
If you are self-employed and had at least $400 in self-employment income, you also have to file. Furthermore, there are other circumstances where you should file a tax return, even though your income is below the thresholds.
In addition, to receive the stimulus payment from the CARES Act for coronavirus relief, taxpayers must have filed a 2018 or 2019 tax return.
US expats can avoid double taxation and lower their taxes with specific tax benefits
Expat taxes are different in many ways from the tax returns that you may have filed while living in the United States. While there are additional requirements for expats, there are also many tax benefits for Americans abroad, such as:
- Excluding income from taxation with the Foreign Earned Income Exclusion (FEIE)
- Claiming the Foreign Housing Exclusion or Deduction to reduce living expenses
- Applying the Foreign Tax Credit (FTC) to offset tax paid to other countries
- Using applicable tax treaty benefits to exclude other income from US taxation
Through these exclusions, deductions and credits, many US expats can reduce or even eliminate their US tax burden.
More on the FEIE, Housing Exclusion, FTC, and tax treaties below.
Foreign Earned Income Exclusion (FEIE) can lower or eliminate income tax
The Foreign Earned Income Exclusion can result in huge savings for US expat taxes. The FEIE is one of the most beneficial exclusions for many Americans abroad. Some expats, however, benefit more from the Foreign Tax Credit. More about that later.
Through the FEIE, US expats can exclude up to $105,900 of their 2019 earnings from US income tax. In 2018 the maximum was $103,900.
The IRS adjusts this amount each year for inflation, although the Trump tax reform in 2017 changed the inflation index to a slower-growing index.
This exclusion applies to foreign earned income only. Income earned in the US is still subject to income tax. You also cannot claim the FEIE for passive income, such as interest, dividends, rental income, etc.
Form 2555 is needed to claim the Foreign Earned Income Exclusion (FEIE)
Americans working abroad don’t automatically get the Foreign Earned Income Exclusion. Instead, they must apply for it using Form 2555 as part of their US tax filing. In addition, they must meet the IRS’s residency requirements to qualify.
There are two types of residency tests that can be used:
- Physical Presence Test – Spending a minimum number of days in foreign countries
- Bona Fide Residency Test – Having your home and strong ties in a foreign country
Physical Presence Test – Counting days outside the USA
Expats qualify for the FEIE under the Physical Presence Test (PPT) if they spend at least 330 days in a 365 day period in a foreign country or foreign countries.
This requirement is often misstated as “no more than 35 days in the US”. However, travel days to and from the US and time spent in or over international waters don’t count as days in a foreign country.
Fortunately, the 365 day-period does not have to be the calendar year. It can be any period that starts or ends in the tax year. For example, you could leave the US on July 1 and return on July 1 of the following year and be in a foreign country for 330 full days during this period.
This allows expats to select a timeframe that maximizes their time in foreign countries and therefore the exclusion amount they can claim under the FEIE.
New expats often request an extension to file until October 15. This gives them more time to qualify for the FEIE. More about the deadlines, and a special provision for expats, later.
Bona Fide Residence Test – Having your home in a foreign country
Being a bona fide resident of a foreign country is another way to qualify for the FEIE. While the PPT is clear cut – counting days – the Bona Fide Residence Test is more subjective.
To qualify you must have your home in a foreign country and have strong ties there. No single tie or list of ties determines your resident status. Rather a collection of strong ties abroad and no ties in the US help to qualify. Strong ties include:
- Long-term lease or own home
- Family members there
- Health insurance
- Local bank accounts (keep in mind that you may have to report on the FBAR)
- Gym membership
- Church membership or other community involvement
The Bona Fide Residency offers more flexibility when it comes to spending time in the US.
Foreign Housing Exclusion and eligible expenses
American expats that claim the FEIE can also use the Foreign Housing Exclusion or Deduction to save on eligible housing expenses. This helps to offset the higher cost of living in many foreign countries.
In order to qualify for the Foreign Housing Exclusion or Deduction, you must qualify for and use the FEIE. Like the FEIE, the Housing Exclusion or Deduction is also claimed Form 2555.
In most foreign countries, US expats can deduct or exclude between $30,000 to $50,000 in housing expenses. The exact amount varies depending on where you live. The IRS updates the limits each year.
Expensive cities have even higher exclusion limits. The city with the highest maximum exclusion is Hong Kong with $114,300. US expats living in Singapore can deduct up to $82,900 in housing expenses. And in Geneva, up to $94,300 for 2019.
Eligible expenses must be reasonable housing expenses that you, your spouse, or dependents incurred as a result of living abroad.
Expenses such as personal property insurance, leasing fees, rental furniture, parking rental, and repairs are all eligible for the Foreign Housing Exclusion or Deduction.
Housing expenses that are non-essential or deemed extravagant are not eligible for the Foreign Housing Exclusion or Deduction. Mortgage payments, costs associated with domestic labor, television services, internet, telephone, and purchased furniture do not qualify for exclusion or deduction.
Foreign Tax Credit (FTC) offsets taxes paid abroad
The Foreign Tax Credit (FTC) is another popular option for US taxpayers living abroad. Using the FTC, expats receive a dollar-for-dollar credit for taxes paid to another country. This can offset or even entirely eliminate taxes due to the US government.
You cannot use the FTC for income that you have already excluded using the FEIE.
However, you can apply the Foreign Tax Credit against any income that exceeds the FEIE threshold or that was not excluded originally.
Using the Foreign Tax Credit instead of the FEIE can often make sense in countries with higher tax rates than the United States.
You can even carry over unused tax credits from a high-tax jurisdiction for use at a later date when you move to a low-tax jurisdiction. Talk to an experienced expat tax accountant to evaluate which is better for your situation.
Self-employed abroad may have to pay self-employment tax
Self-employed expats need to know that the FEIE only excludes income from income tax. They must still pay self-employment tax on the net earnings.
The self-employment tax is 15.3% for the first $132,900 of income, plus 2.9% on net income in excess of $132,900.
On the other hand, if your residence country has a Social Security Totalization Agreement with the United States, then you can choose which country you would like to contribute to, based on your personal and tax situation. For example in Italy, you can choose to pay the US 15% self-employment tax or the 25% Italian equivalent.
Without a Totalization Agreement, you may end up having to pay into both countries’ systems.
Tax Treaties offer benefits to expats
The United States has Tax Treaties with over 60 countries, including most (but not all) popular expat destinations.
The list of countries with income tax treaties includes Australia, Canada, most of Western Europe, Mexico, China, Japan, and even far-flung places like Kyrgyzstan. Singapore, Hong Kong, UAE, Brazil, Colombia, however, don’t have a tax treaty with the US at this time.
Tax Treaties can provide exemptions or reduced tax rates for certain types of income, including retirement/pension plans, as well as reduced withholding rates in passive income such as dividends and interest.
An experienced expat tax accountant will make sure to apply all applicable treaty benefits to your US tax return.
Report foreign bank accounts on the FBAR (FinCen 114)
The Foreign Bank Accounts Report (FBAR) is a requirement for most Americans abroad.
If the combined value of your foreign financial accounts was greater than $10,000 at any time during the calendar year, you must report all of your foreign accounts. The combined value includes any accounts which you have a financial interest in or signature authority over.
The Foreign Bank Accounts Report is filed electronically with the Treasury Department using FinCen Form 114.
Make sure you understand the specific requirements and file correctly. Failure to disclose all relevant accounts can lead to hefty fines.
The FBAR is due on April 15, however, the government grants an automatic extension to October 15.
Other foreign financial assets may need to be reported on Form 8938
If you have other foreign financial assets such as mutual funds, foreign pensions, stocks, bonds, loans, and other investments you may also need to file Form 8938 (video). This form is filed together with your tax return.
The threshold for Form 8938 is higher than for the FBAR and varies depending on your filing status.
A US expat filing a joint return must file Form 8938 if the value of the foreign assets exceeds:
- $400,000 on the last day of the tax year, or
- $600,000 at any time during the year.
For a US expat filing as single, Form 8938 is required if the value of the foreign assets exceeds:
- $200,000 on the last day of the tax year, or
- $300,000 at any time during the year.
Please be aware that the filing thresholds for Form 8938 are significantly lower for someone who lives in the United States.
US expats may have to pay state taxes
As an American abroad, you may still have to pay state taxes to your former state of residence. Your obligations depend on the specific state.
The easiest states for US citizens abroad are those which do not have income tax. This includes Florida, Nevada, Texas, and Washington, among others.
Some other states have a neutral stance towards expats. These states will generally stop considering you a tax resident after you have been gone for a certain period. A few of these states may also ask you to file paperwork proving your new residency. Fortunately, in most neutral states you are unlikely to face many hurdles.
The most difficult and aggressive states are California, South Carolina, New Mexico, and Virginia. Issues have also been reported with Massachusetts, Maryland, and North Carolina.
It is important to be aware of your state requirements. If you stop filing and then return to live in the state, the state may notice the gap in your filings. If you cannot prove that you were a resident somewhere else during those years, they may ask you to file and pay taxes for those missing years.
2020 Expat tax filing dates – Extended due to coronavirus
Generally, expats receive an automatic 2-month extension to file the US tax return. For 2020 however, with the ongoing coronavirus crisis, the deadline for all individual taxpayers, including expats has been extended to July 15, 2020.
If you still need more time, maybe to qualify for the FEIE, you can request an extension to October 15. Nonetheless, any tax owed should be paid by July 15, 2020 to avoid interest and late penalties.
In certain circumstances, a further extension until December 15 may be available at the discretion of the IRS.
Filing your US taxes from abroad
Living abroad can be exciting but also often complicated. Your US tax return also becomes more complicated. However, US taxpayers living abroad can potentially take advantage of significant tax benefits, when knowing what tax provisions apply to them.
This Guide to US Expat Taxes gives an overview of the key tax implications of being a US citizen living abroad. Of course, every situation is unique. Our team specialises in the preparation and submission of US Tax Returns for non-US resident expatriates and UK investors. To speak to an adviser about your US/UK Tax affairs, please call Rachel Finch, Director, on 01275 867350. Alternatively, you can send a message to the team now.