20 Things Americans Overseas Should Know about Taxes for Expats
15 min read
February 09, 2023
February 09, 2023
At a glance
Did you know Americans overseas still have to pay U.S. expat taxes? Find out the top 20 things you should know if you’re filing taxes as an expat with the tax pros at H&R Block.
For many Americans, moving abroad is an exciting opportunity to travel the world and live life to the fullest. Whether your motivation is to find your Zen in southeast Asia or take your career to the next level in London, it’s easier than ever to pack up and relocate to a foreign country — as long as you stay compliant with your U.S. expat taxes.
If you earn foreign income, not understanding your U.S. tax obligation can lead to some serious consequences. To help you out, we distilled the basics of U.S. taxes for expats down to 20 things you should know.
Basics of Taxes for Expats
1. Do expats pay taxes? Yes, you file a U.S. tax return if you’re a U.S. citizen and make over the general income threshold — regardless if you live abroad or Stateside.
The most common question we hear is, “do expats pay taxes?”
This might come as a surprise to you, but yes — if you earn over a certain amount of income (domestic and foreign) and are a U.S. citizen, you have to file a U.S. tax return. The United States is one of only two countries that taxes based on citizenship, not place of residency. That means it doesn’t matter where you hang your hat — if you’re legally a U.S. citizen, you have a tax obligation to the U.S.
Taxable foreign income for U.S. citizens living abroad includes:
- Rental Income
How do you file taxes as an expat? The same way you would if you were stateside. The main difference is what forms you have to fill out.
2. Most American expats do not end up owing U.S. taxes
While yes, U.S. citizens file a yearly tax return even if they live abroad, U.S. expats don’t usually end up owing anything.
While there is no overarching tax exemption for U.S. citizens living abroad, there are a variety of mechanisms in place to prevent Americans from being double taxed on foreign-earned income. In most situations, U.S. expats can offset foreign-earned income with:
- The Foreign Tax Credit (FTC)
- The Foreign Earned Income Exclusion (FEIE)
- The Foreign Housing Exclusion
We’ll dive more into these (what they do, how to qualify, etc.) further down.
3. Expats might still have to file U.S. state taxes
Do U.S. citizens living abroad need to file state taxes? It’s possible. Living overseas doesn’t automatically exclude you from paying state taxes — it depends on the state you lived in prior to moving abroad. If you are unsure if you have to pay state taxes while living abroad, we recommend consulting with an expat tax professional to ensure you stay compliant.
Expat Tax Deadlines and Penalties
When are taxes due for expats living abroad? What happens if you’ve never filed? Understanding your expat tax deadlines and the associated penalties that come with non-compliance will be key to avoiding fines, fees, and nasty surprises from the IRS.
4. Expats can receive tax penalties for not filing
Yes, even though you live abroad, you may still have to file your U.S. taxes, and there are penalties for being non-compliant. The best way to avoid tax penalties is to make sure to file with a service that offers a 100% Accuracy Guarantee, like H&R Block Expat Tax Services does.
5. FBAR and FATCA penalties can add up to $50,000 if you willfully don’t file
FBAR and FATCA penalties are steep if you knowingly fail to file. If you meet the requirements and you’re found willfully failing to file an FBAR you can be fined up to the greater of $124,588 or 50% of the total balance in all your overseas accounts.
If you meet the requirements and fail to file FATCA Form 8938 you can be fined from $10,000 up to $50,000 if you don’t act timely.
These are compounding penalties—meaning if you willfully ignore the IRS and FinCEN and don’t file for 10 years, you could owe the better part of $500,000 in fines and penalties (not to mention lose your passport and even face jail time).
6. Expats can eventually lose their passport for failing to file
You read that right: Penalties for serious tax evaders and major delinquency can result in a revoked passport and even jail time. The IRS can charge U.S. tax penalties for a variety of reasons, but the most common are:
- Failure to file – If you owe taxes and you fail to file, fines start at 5% and go up to 25% of unpaid tax—and that doesn’t include fines and interest on the owed amount. There isn’t a penalty for filing taxes late if you owe nothing, but you won’t have access to your refund until you file.
- Failure to pay – If you don’t pay your taxes owed, you’ll accrue interest on the unpaid balance until you repay it in full. Then you’ll be fined the late payment penalty of 0.5% of the tax you owe for each month it’s late, up to 25%.
- Dishonored check – you may be fined for a dishonored check.
7. Live abroad and never filed taxes? You can get caught up on multiple years of expat taxes with Streamlined Filing Compliance Procedures
It’s common for dual citizens and Americans living and working overseas to overlook their tax obligations—many don’t even know they have to file U.S. taxes. If you’re a U.S. citizen abroad who has never filed a tax return, you’re in luck — the IRS understands it’s a confusing topic and generally shows lenience with genuine mistakes. You can get caught up on multiple years of U.S. expat taxes with the Streamlined Filing Compliance Procedures. To qualify, you must:
- Have lived in a foreign country without a U.S. abode for at least 330 days during one of the last three years
- Confirm it was an honest mistake that you failed to file U.S. tax returns and FBAR
Ready to start your multi-year filing? Get started on Streamlined IRS Filing with H&R Block — the experts on U.S. taxes for expats.
8. Your 2022 U.S. expat taxes are due April 18, 2023, with an automatic extension to June 15, 2023
The deadline to file your U.S. tax return is April 18, 2023, but U.S. citizens abroad are granted an automatic extension to June 15, 2023. If you end up owing taxes, the deadline to pay tax due is April 18, regardless if you live stateside or abroad.
9. You can apply for a tax and FBAR extension to extend your U.S. expat tax deadline to October
Even if the country you’re living in has a fiscal year-based tax system (like taxes for expats in the U.K. and Australia) U.S. taxes are still reported on a calendar-year basis. If you need an extension to get more time to gather information before the end of your resident country’s tax year, we can help you file Form 4868 to extend your deadline to October 15. The deadline for requesting an extension is June 15.
Tax Benefits for U.S. Citizens Abroad
What happens if you have to pay taxes in the country you’re now living? How do you avoid double-taxation? The U.S. has a few benefits and treaties to help prevent double-taxation and a heavy tax burden on U.S. citizens living abroad. Get to know them, because not understanding them or claiming them incorrectly can result in penalties and over-taxation.
10. U.S. expat tax treaties, the Foreign Earned Income Exclusion, and the Foreign Tax Credit help prevent Americans from being double taxed on income earned abroad
You’ve probably wondered how much foreign income is tax-free in the U.S. Because the U.S. taxes based on citizenship, the government provides American expatriates with a variety of aids to prevent them from being double taxed — once by the U.S. and once by the country they’re living in. These aids include:
- Tax treaties – To prevent double-taxation on income, U.S. taxes for expats are offset by income tax treaties with more than 70 countries. Not all tax treaties are the same—different countries have different agreements.
- The Foreign Earned Income Exclusion – The FEIE is the most common and broadest aid to prevent double-taxation. You qualify if you live and work overseas and pass either the Bona Fide Residency test or the Physical Presence Test. If you qualify, you can exclude up to $108,700 for tax year 2021, and $112,000 for 2022.
- Foreign Tax Credit – The Foreign Tax Credit is used to claim a dollar-for-dollar credit on foreign taxes paid on income from your expat job. If you live abroad and you have to pay taxes or have acquired a foreign tax liability, you may qualify.
Ready to file? Get started with H&R Block — the experts on U.S. taxes for expats.
11. You need to be careful when deciding between the Foreign Earned Income Exclusion vs. the Foreign Tax Credit
Choosing whether to claim the FEIE, FTC, or both will have a substantial impact on the outcome of your tax return, and you should consider all of your options carefully before filing. For example, if you had been using the FEIE but decide to switch to the Foreign Tax Credit you may find yourself locked out of the FEIE for five years.
Big factors U.S. expats should consider when choosing between the FEIE or the FTC include:
- Your income type and source
- Your housing expenses
- Your future plans for life and work abroad
- Your dependents and their U.S. citizen status
- Whether you pass the Bona Fide Residency test or the Physical Presence Test
- Your current country of residence and its local tax laws
- Your foreign tax liability to your country of residence
Having trouble choosing between the two? We’ll help determine the best choice for your situation when you choose to file with help from an advisor.
12. To claim the Foreign Earned Income Exclusion, you need to file Form 2555 and pass either the Bona Fide Residency test or the Physical Presence Test
To qualify for the Foreign Earned Income Exclusion, you have to pass one of two tests: The Bona Fide Residency Test or the Physical Presence Test. To pass, you have to have lived abroad for a certain number of days and have had limited connections with the U.S. If you qualify, then you’ll have to file Form 2555 to claim the FEIE.
13. If you want to pass the Bona Fide Residency or Physical Presence Test you need to track your time carefully
This trips up a lot of American expatriates looking to claim the FEIE. In order to claim the FEIE you need to pass either the Bona Fide Residency Test or the Physical Presence Test. Tracking your time is essential because you could fail the Physical Presence Test if you’re off by even a few hours. To qualify, you must have been in a foreign country for 330 full days out of the year—the “full days” is where U.S. expats get tripped up. If, for example, you’re on a 12-hour trans-oceanic flight, those 12 hours may not count toward your full 330 days because you’re technically in international airspace.
To qualify as a Bona Fide Resident, for the first year you need to have been living in a foreign country for an entire tax year, which is where many expats get confused. If you go back to the U.S. to visit family for a month, the time you spend in the U.S. does not count.
As with most overseas tax situations, there are a variety of different stipulations and considerations, so it’s always smart to let an expat tax professional help you navigate U.S. taxes while living abroad.
Expat Tax Forms and other Foreign Financial Reporting Requirements
Taxes for expats include other reporting requirements than just telling the IRS about your salary. If you have foreign financial assets and investments, you may have additional forms and filing requirements.
14. You may need to file an FBAR, FACTA Form 8938, or both if you have foreign assets or investments
Filing taxes as a U.S. expat isn’t easy — many tax forms seem identical and knowing which is which can cause you a headache. For example, take your FBAR (FinCEN 114) and your FATCA Form 8938 — you may have to fill out one, none, or both. A big difference between the two is that the FATCA Form 8938 gets sent to the IRS and your FBAR gets sent to FinCEN, the U.S. Treasury Department’s Financial Crimes and Enforcement Network.
Learning the FBAR and FATCA filing requirements should be at the top of your U.S. expat taxes to-do list, because making a mistake can lead to penalties ranging from hefty fines to jail time.
15. There are hundreds of IRS forms and schedules — but these are the most commonly used when filing U.S. taxes for expats
- Form 1040 – The form every American files during tax season to report income to the IRS.
- FBAR (FinCEN Form 114) – Your Foreign Bank Account Report, used to report any assets in foreign financial institutions to the Financial Crimes Enforcement Network of the U.S. Treasury.
- Foreign Earned Income Exclusion Form 2555 – One of two methods for U.S. expats to avoid being double-taxed on income earned abroad.
- Foreign Tax Credit Form 1116 – One of two methods for U.S. expats to avoid being double-taxed on income earned abroad.
- FATCA Form 8938 – How you report assets in foreign financial institutions to the IRS.
- Form 5471 – Informational return for U.S. citizens who are also shareholders, officers, or directors of a foreign corporation.
- Form 8621 – Informational return for U.S. citizens who are also shareholders of a passive foreign investment company.
- Form 3520 – Informational return expats use to report certain transactions with foreign trusts, ownerships of foreign trusts, or if you receive certain large gifts from certain foreign persons.
Expat Taxes and Your Family
Many expats live overseas along with their family, which can present a few challenges when it comes to filing taxes. For example, if your spouse is a non-resident alien, or if you’re claiming benefits like the child tax credit, you may have additional or different forms to file.
16. Married someone overseas? You can file a joint tax return with a non-resident alien spouse — but it comes with other U.S. expat tax implications
Marrying a non-American while overseas is commonplace for Americans overseas, and taxes for expats aren’t top-of-mind when walking down the aisle.
You have a few different tax return options when you’re married to a non-resident alien spouse and each option has major implications. For example, if you choose to file jointly with your NRA spouse by making an election to treat them as a U.S. person, they may be required to pay U.S. taxes on their entire income and be subjected to additional reporting.
Be careful when choosing how to file your U.S. expat taxes – tax law is difficult (at best) for most Americans to understand and adding a foreign spouse to the mix doesn’t make it any easier. Because making a mistake can lead to years of financial regret, it’s always best to leave it to someone who’s an expert in U.S. taxes for expats.
17. Claiming children as dependents on your expat taxes has both perks and drawbacks
If you live abroad with your family, you may be wondering about claiming the child tax credit. First off, understand that while you’re living abroad your eligibility can differ. For example, if you claim the FEIE, you’re not able to claim the refundable portion, meaning the child tax credit by itself will not lead to a refund on your return.
Taxes for Expats Retired Abroad
18. If you retire abroad, you may still have to pay U.S. expat taxes on your retirement income and social security payments
That’s right, just because you’ve retired abroad doesn’t mean you’re off the hook for your taxes. Depending on the type on income you have, you may need to still have to file and pay U.S. taxes. This is the same for estate taxes for U.S. citizens living abroad. Make sure you understand the rules of 401(k) and IRA withdrawals overseas so you avoid hefty penalties.
19. Foreign retirement plans or certain investment accounts owned abroad may not be treated the same as their U.S. counterparts
You need to be careful when selecting or transferring your 401(k) abroad. International retirement plans may be treated differently than their U.S. counterparts, drastically changing your tax liability. For example, some foreign pensions and overseas accounts require more documentation than others to stay in compliance.
It’s critical to understand 401(k) and IRA rules abroad and know exactly what forms fit your situation, because misreporting or filing the wrong expat tax forms may incur large penalties starting at $10,000. If you have either international retirement plans or investment accounts overseas, you should always use professional U.S. expat tax services so you don’t accidentally miss a form and end up owing more tax.
U.S. Expats and Coronavirus
20. In 2020 and 2021 U.S. government enacted emergency COVID–19 benefits for U.S. taxpayers, including three Economic Impact Payments (EIPs), or Stimulus Checks
In 2020 and 2021 the U.S. government enacted three rounds of legislation to boost the economy and provide relief for affected Americans. Included are three stimulus payments unemployment benefits, child tax credit expansions, and other provisions to provide relief. Expats that fall within the income threshold and have a Social Security number qualified for the benefits. If you didn’t receive your stimulus payments you can still get the money you’re owed in the form of a recovery rebate credit. See more in the IRS’ Fact Sheet.
Get help with U.S. taxes for expats with H&R Block’s Expat Tax Services
Confused about how taxes for expats work? We don’t blame you. But relax, we live for this stuff, and your H&R Block Tax Advisor will know exactly what to do with your specific situation.
Ready to file your U.S. expat taxes? Get started with H&R Block’s Expat Tax Services today! If you’re a multi-year filer, after you answer a few basic questions you can schedule a phone consultation with your tax advisor to confirm your price and have any questions answered.
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