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Exactly which US expats have to file an IRS tax return?

Contributed by Bright!Tax
14 February, 2017

The US is the only developed country that taxes based on citizenship rather than residence. This means that if you are a US citizen, you are liable to report your worldwide income and pay US taxes on it, wherever in the world you live.

The same minimum reporting thresholds apply for expats as do for Americans living in the US. This means that if you earn more than around $10,000 and you aren't a dependent (if so the figure is lower), you have to file a federal tax return, regardless of in which country your income was sourced. The threshold rises a little each year, is a little higher if you're over 65, is lower if you're married to a foreigner who isn't a US tax payer and you're filing separately, and is much lower if you're self-employed (just $400).

The good news though is that there are several exemptions available that will remove most expats from US tax liability altogether. Crucially though, you still have to file a tax return and declare your worldwide income to claim these exemptions.

Filing deadlines

Filing deadlines for expats are different however. Any taxes due must still be paid by April 15th, however tax returns don't need to be filed until June 15th, with a further extension available until October 15th.

Extra expat filing requirements

Expats who have control over foreign bank, pensions, mutual or investment accounts (even if they are just a signatory, such as for a business account) with a combined total balance of over $10,000 at any time during the tax year are required to report their overseas accounts by filing a Foreign Bank Account Report (FBAR). In practice, this means filing FinCEN form 114 online. The filing deadline for FBARs is April 15th, however an automatic extension is available until October 15th, making this later date the effective FBAR filing deadline.

FATCA (the Foreign Account Tax Compliance Act) meanwhile requires expats to report their foreign assets if their total value is over $200,000 per person, not including property (or other tangible assets such as art, jewelry or cars). Foreign assets should be reported on form 8938.

Expat exemptions

Now for the good news. There are two main exemptions that expats can consider claiming to reduce or eliminate their foreign earned income.

Expats who are tax payers in a country with higher income taxes than the US should consider claiming the Foreign Tax Credit. It entitles US taxpayers to a $1 tax credit for every dollar of tax that they have paid to a foreign government. So if you are paying income tax at a higher rate than the US rate, you can claim more credits than your US tax liability, which can be carried forward for future use. The Foreign Tax Credit can be claimed by filing form 1116 with your return.

The other main exemption is the Foreign Earned Income Exclusion, which lets expats exclude up to around $100,000 of foreign earned income from US tax liability. This is a good choice for expats who aren't paying tax in a foreign country, such as Digital Nomads. To qualify, you have to either prove permanent residence in another country or prove that you spent at least 330 days outside the US in a 365 day period that overlaps with the tax year.

While both of these exemptions can be claimed together, they can't be claimed on the same income, so it would make sense to claim both for example if you are earning over $100,000 and live and pay taxes in a country with lower income tax rates than in the US.

Catching up

For expats who weren't previously aware of their requirement to file a US tax return, there is an IRS amnesty program that allows them to catch up without facing any penalties called the Streamlined Procedure. They simply have to file their last 3 years' tax returns, and their last 6 years' FBARS (if applicable), pay any tax due (often none after applying exemptions), and self-certify that their previous non-compliance was non-willful.

We strongly recommend that US expats who should be filing but aren't to consider catching up before the IRS comes to them to avoid fines and pay less tax, as the above exemptions may not be available during an audit. Furthermore, over 200,000 foreign financial institutions including banks are reporting their American account holders to the US, so that they know how much you have in your account and where to find you, despite being an expat.

Bright!Tax is a leading provider of US tax services to Americans living overseas. If you have any questions, or would like some advice, get in touch and we'll be provide you with some advice.


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