Wondering Whether To File Taxes As An American Expat?
Around 8.5 million American citizens live overseas. However, many of those citizens aren’t aware that even though they do not live in the US currently (and are filing their taxes in the country of their residence), they still need to file US tax returns.
Why do you still need to file US tax returns?
That’s because the US taxation system is a citizenship based system. Citizenship-based taxation means that the tax filing rules for Americans living abroad are the same as those for Americans living in the US (with some complex rules, yes).
If your worldwide income exceeds minimum thresholds, you have to file a US tax return.
These are several thresholds which we’ve discussed previously. But just to give you one example – one threshold starts at just $5 of global income in a financial year for Americans who are married but filing separately.
Why Do Most Expats Not File US Taxes?
The number of US expats might be nearly 8.5 million, but amidst them only a handful (around 15%) of them are filing taxes to the IRS.
Simply because they are unaware that they have to file US taxes even if they are living abroad.
It is perfectly natural for you to assume that if you move overseas, you’ll only pay taxes in the new country you move to. That’s why the majority of the expats assume that the US (like many other countries) has a residence-based tax system, so they file their taxes in the country of their residence.
But just to be clear once again – the US has a citizenship-based tax system. Meaning, if you are a US citizen, you need to file your tax returns in the US as well (no matter where in the world you’re living).
So Do You Need To Pay Taxes Twice?
No. Most likely not.
Most US expats don’t owe taxes to the US.
Filing your US tax returns from abroad does not actually mean that you have to pay actual taxes to the US. Ultimately, you may just pay $0 but you have to file your returns.
However, filing is usually troublesome for expats who try filing themselves because they can end up filing incorrectly and thus, getting taxed twice on the same income – by paying to the US and to the country you currently live in. The US has put in several deductions and credits that an expat who is filing from abroad can claim and these deductions are really essential for you to leverage.
Most of the US expats are able to get exclusions from the tax, like:
- Foreign Earned Income Inclusion
- Foreign Tax Credit
- Foreign Housing Exclusion
- (There are many more)
Exclusions cannot be claimed automatically. You must fulfil the IRS criteria and fill the required forms correctly to claim these exclusions.
Majority of American expats end up owing no US income tax when they file from abroad (consulting an expert though) and filing from abroad becomes an annual reporting exercise, albeit an obligatory one.
Expats Need To Provide Proof Of Living Abroad
An expat must demonstrate that they live abroad by qualifying for any of the two tests mentioned by the IRS to claim for the exclusions.
Bona Fide Residence Test – If you are a permanent resident of the country that you currently live in (you have permanent residency visa), or you pay taxes there, or your main home is there, then you qualify under the Bona Fide Residence.
Physical Presence Test – You must be physically present in a country for 330 days out of 365 days for the tax year.
You must calculate your days very carefully. This does not include the time spent traveling to or from the US.
Even the slightest mistake could cost you a heavy amount. It is advisable to consult an US expat tax expert before you file your 2021 tax return.
Didn’t File Your US Tax Returns Or Missed The Deadline? Apply For An Extension.
Don’t worry if you missed filing your US tax returns.
All expats residing outside of the US get an automatic time extension to file till June 15th each year.
You can apply for extension till October 15th or fill Form 4868 (expats have to fill numerous forms for various exclusions, settlements or extension) to buy you even more time.
We know it’s tough for you to manage everything, so leave your Contact US Tax Pros for tax related queries for us to solve.
Expats who don’t file a timely tax return on the other hand are exposed to IRS sanctions, as the IRS now has access to Americans’ financial data globally.
IRS Amnesty Program
Many US expats are not aware about the tax filing procedure.
Don’t worry if you are one among them and lagging behind in filing your US federal taxes because you were unaware of your requirement to file while overseas.
But the moment you find out, you need to get this taken care of. Because just like with everything else, innocence of the matter does not mean you aren’t guilty.
There are many amnesty programs to help you along the way. Always remember that it’s best for you to approach the IRS before they approach you.
Under the IRS streamlined procedure, you can file back the taxes which you missed unwillingly by:
- Filing your 3 most recent US Tax Returns
- Filing your last 6 FBARs
- Filing form 14653 Offshore Certification – A statement your non compliance was non wilful.
This is the most sensible course of action for expats who haven’t been filing from abroad due to lack of awareness or not fully understanding the rules of filing US returns from abroad.
We will help you out with this IRS amnesty program called the Streamlined Foreign Offshore Procedures.
Foreign Bank Account Report (FBAR) – An FBAR is another U.S. reporting requirement. that affects many Americans with bank or other types of financial accounts abroad – U.S. Tax Pros helps you for free with this.
Do Expats Need To Pay State Taxes?
At the risk of repeating ourselves, we’d like to clarify once again –
Filing taxes does not mean you have to pay taxes.
So just because you are required to file taxes, does not mean you actually owe dollars to the IRS.
Every US State has their own rules and regulations regarding the taxation system for expats. You might be living abroad but whether or not you will need to file state taxes while living abroad depends on the state you lived in and if you still have ties to the state (such as property, voter registration or dependents).
While some states levy taxes on expats, fortunately there are some that don’t charge any taxes at all.
The states that do not charge taxes are –
- Washington State
- South Dakota
State that require you to file taxes are –
- South Carolina
- New Mexico
(These are called “sticky states” because their tax filing requirements can be complicated.)
New Hampshire and Tennessee assess income taxes only on dividend and interest gains.
To avoid paying state income taxes while living overseas, you’ll want to abandon residence in any state that levies income taxes and establish a new residence in a state without income tax.
Sorry to be the bearers of not-so-shiny-news, expats who do not file their US tax returns timely or at all will face serious penalties from the IRS.
Those who did not file ‘unwillingly’ might be eligible to file under the IRS Amnesty Program, but the expats who do not file their US tax returns ‘willfully’ and are found to be non compliant may face heavy penalties.
Not knowing about your tax obligations and, therefore, not fulfilling them is considered a non-wilful violation. But if you were aware of your tax obligations and chose not to file or pay for any reason, then it is an expat wilful violation.
The former approach leads to lower tax penalties and fines for US expats, or sometimes no penalties at all. And the later one will lead to heavy penalties and an empty pocket.
Serious tax evaders can be put behind the bars in some cases and they might even get their passport canceled.
Now that you understand that as a US citizen you have to file your US tax returns, no matter where you’re currently residing, we think it’s time for you to get down to business and get your filing done. U.S. Tax Pros are happy to consult with you to get this done for you.