More than 6.8 million Americans (excluding military personnel) live abroad in over 160 countries, according to the U.S. State Department. In this article, we discuss the tax rules and regulations that affect U.S. citizens and resident aliens residing overseas.
Filing RequirementsThe Internal Revenue Service (IRS) requires American citizens and resident aliens who live outside of the United States to file income tax returns if their gross income is greater than or equal to the applicable exemption and standard deductions. It is also recommended that those whose income is less than the applicable exemption and standard deduction also file for income tax return. According to the AARO, U.S. tax filing requirements apply equally to Americans regardless of the country in which they currently reside. Thus, citizens and resident aliens working overseas may be subject to double taxation (from both local and U.S. tax authorities), but individuals should check with a tax professional or the IRS because not all situations are the same.
Taxpayers are required to submit income tax returns, as well as estate and gift tax returns (if applicable). If you work abroad, you need to file a return if your gross income exceeds certain thresholds established by the IRS. Here are the amounts based on filing status (2019 figures): single ($12,200), single and 65 or older ($13,850), head of household ($18,350), head of household and 65 or older ($20,000), qualifying widow(er) ($24,400), widow(er) and 65 or older ($25,700), married filing jointly ($24,400), married filing jointly and not living with spouse at end of year ($5), married filing jointly and one spouse 65 or older ($25,700), married filing jointly and both spouses 65 or older ($27,000), and married filing separately ($5).
Foreign Financial AssetsThere is an additional reporting requirement beginning in 2012. Under the IRS's "Offshore Voluntary Disclosure Program," Americans who have foreign financial assets exceeding $50,000 for individuals and $100,000 for married couples filing jointly must report these assets. Qualifying assets include bank accounts, any stock, security or financial instrument issued by a non-U.S. entity/person, and any interest in a foreign entity. If you qualify, you'll need to submit Form 8938 along with your tax return.
Physical Presence TestYou must live in a foreign country (or countries) for at least 330 full days in a 12-month period. According to the IRS, expatriates are allowed to reside and work in more than one foreign country. However, they must be physically present in those countries for at least 330 days over a calendar year.
Foreign-Earned Income ExclusionThe foreign-earned income exclusion is designed to reduce the effect of Uncle Sam's double taxation policy. For 2019, Americans can exclude up to $105,900 annually in foreign wages. Taxpayers claiming this exclusion will pay tax at the rates that would have applied had they not claimed the foreign-earned income exclusion. This means that instead of applying the lowest possible rate, expatriates will be taxed starting at their normal tax bracket (had they not used the exclusion) after using up the initial $105,900.
Foreign Housing ExclusionExpatriates can exclude amounts paid by their employer for housing-related expenses. These employer-paid benefits do not have to be reported as part of your foreign-sourced income. Americans cannot exclude the same amounts twice (i.e., sources rooted from both foreign wages and housing-related benefits). Additionally, self-employed individuals do not qualify for the foreign housing exclusion. To prevent abuses, expatriates can claim a maximum foreign housing exclusion up to 16% of the foreign-earned income exclusion. Also, independent contractors cannot claim the foreign housing exclusion. Instead, independent contractors must select the foreign housing deduction on Form 2555.
The IRS considers the following as qualifying amounts for the foreign housing conclusion: rent, repairs, utilities other than telephone, homeowners and renters insurance, occupancy taxes, nonrefundable security deposits or lease payments, furniture rental, residential parking fees and tax equalization payments paid by your employer.
Due DatesAmericans residing and working abroad have until April 15 to file and pay their taxes. However, the IRS provides an automatic extension for expatriates who have until June 15 to file their U.S. income tax returns. By filing Form 4868 by June 15, taxpayers can request an additional extension up to October 15. A letter request to the IRS can further push back the extension until December 15.
The Bottom LineFinally, expatriates who renounce their U.S. citizenship won't be off the hook from the IRS. They are still subject to U.S. tax laws for ten years after renunciation.