Everything You Need to Know About American Expat Tax Calculation

Published: 29th January 2021

Are you an American citizen living abroad? Worried about filing your taxes? US taxes are overwhelming and confusing when you're living in the States. They're even more daunting when you're living abroad.

Filing your American expat tax return may feel like a minefield. One mistake can lead to huge penalties and legal repercussions. But you can avoid those mistakes with a little preparation ahead of time.

Keep reading to learn more about US tax law and how to file your taxes when you're living abroad. The more you understand ahead of time, the easier filing your US expat tax return will be.

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Who Needs to File an American Expat Tax Return?

Everything You Need To Know About American Expat Tax Calculation - Are you a recent U.S. expat? If so, your taxes will be more complicated than they were before. This is what you need to know regarding American expat tax.

Essentially, any US citizen or Green Card holder living abroad who makes above a minimum income must file a US tax return. Most people won't owe any taxes, but they still need to file their returns.

April 15th is generally the deadline for filing US taxes, but US expats automatically receive an extension until June 15th. One thing to note, however: even though you don't need to file until June 15th, you do need to pay any taxes due by April 15th. If you don't, you may get a penalty or need to pay interest.

You do not automatically avoid paying US taxes by renouncing your citizenship. It's a long and sometimes expensive process. You could be subject to an exit tax, depending on your income and overall net worth.

Foreign Tax Credit and Foreign Earned Income Exclusion for US Expat Tax Filing

Most expats won't owe anything on their US taxes. There are deductions and credits to make sure you aren't taxed twice on your income. The two main ones are the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE).

Some taxpayers may be eligible for both the FTC and FEIE. Depending on your situation, you may find one offers you better savings than the other. For example, if you claim a child tax credit, the FTC may be a better option for you.

Foreign Tax Credit

The Foreign Tax Credit can offset or eliminate any US tax liability. This is best if you live in a high-tax country or your income exceeds the Foreign Earned Income Exclusion threshold.

Using IRS Form 1116, you can claim a dollar-for-dollar credit on any income taxes you paid to your host country. However, if you are excluding any income with the FEIE, you cannot also include that income on the FTC.

You may be able to carry over unused credits for up to 10 years. If you were not able to claim the full amount of foreign tax that you paid or if you move from a high-tax area to a low-tax area. If you think this could be helpful, but sure to consult with a tax accountant experienced in expat taxation.

Foreign Earned Income Exclusion

The most common way for expats to reduce or eliminate your US tax liability is with the Foreign Earned Income Exclusion (FEIE). Using the IRS Form 2555 (or 2555-EZ), you can exclude up to $107,600 on your 2020 taxes. For 2021, this threshold goes up to $108,800.

You must qualify for the FEIE, it isn't an automatic deduction. You apply using form 2555 and pass a residency test, either the Physical Presence Test or Bona Fide Residency Test.

The Physical Presence test requires you to be physically present in a foreign country for 330 of a 365-day period. With the Bona Fide Residency test, you must live overseas for one calendar year and have no intention of returning to the US. So, if you are on a temporary assignment this would not work for you.

If you qualify for the FEIE, you can't go back-and-forth from year to year in using it or not. Once you have elected to use it if you decide you no longer want it the next year you cannot use it again for the next five years.

Any income earned in the US is not eligible for this exclusion, which is still subject to US income tax. You also cannot claim passive income (for example, interest, dividends, rental income) on the FEIE.

FBAR and FACTA

The US wants their share of income taxes and works hard to keep its citizens from hiding money abroad or in offshore accounts. They track these accounts through the FBAR and FACTA.

The Foreign Bank Account Report (FBAR) is a list of all foreign bank accounts, pensions, and investment accounts abroad. If the aggregate balance of these accounts is over $10,000 at any point in the year, you must file an FBAR. Even if you don't own the account, but you have signature authority over the account, you need to include it.

The Foreign Account Compliance Act (FACTA) reports the value of financial assets such as mutual funds, foreign pensions, stocks, bonds, loans, and other investment accounts. The filing thresholds are higher and may depend on your filing status or residency.

State Tax Returns for Expats Living Abroad

Some states may require you to file a state tax return. Each state has different rules, most significantly is whether you intend to return or not.

If you want to lessen your chance of owing state income tax, you may want to consider moving to a state without an income tax before you leave the country. States without state income tax include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

US Expat Tax Filing While Living Abroad

Living in another country for a long or short period doesn't mean US citizens won't pay any US taxes. Your American expat tax filing can be more complicated than before. But with a little extra time to research and prepare, you can accomplish it.

Use the US Tax Tables and Standard Deduction Calculator on our site to make your filing easier.