U.S. Expat Taxes: 20 Things Overseas Americans Should Know
Curious how U.S. taxes for expats work? Keep reading to find out everything you should know to have a stress-free tax season.
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 the top 20 things you should know.
Ready to file your expat taxes online? Get started with H&R Block's Expat Tax Services today.
1. You must file U.S. expat taxes each year if you're an American who earns foreign income abroad
This might come as a surprise to you, but yes—if you earn over a certain amount of foreign income 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 owe U.S. taxes
The most common question we hear is, "do expats pay taxes?"
Yes, U.S. citizens must file a yearly tax return even if they live abroad—however, U.S. expats don’t usually owe 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 a U.S. state tax obligation, we recommend consulting with an expat tax professional to ensure you stay compliant.
4. If you’re a U.S. citizen abroad, not filing taxes can result in losing your passport, being hit with fines, and other penalties
You read that right–you can lose your passport if you’re not compliant with your U.S. expat taxes. You can also face fines and penalties ranging from a couple thousand dollars to jail time for serious tax evaders.
5. Married someone overseas? You can file jointly 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 expatriates 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.
6. Claiming children as dependents has both perks and drawbacks on your U.S. expat taxes
You get a few perks–like claiming the child tax credit–for claiming your children as dependents on your U.S. expat taxes. However, while you’re abroad, understand that 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.
7. With Streamlined Filing Compliance Procedures, Americans abroad can get caught up on multiple years of U.S. expat taxes
It’s common for 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 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 with H&R Block—the experts on U.S. taxes for expats.
8. The CARES Act enacted emergency benefits for U.S. taxpayers, including a 2020 tax credit (stimulus check) and an extension on 2019 taxes
The CARES Act, also known as the coronavirus stimulus package, was created and passed into law in order to help the economy recover from the COVID-19 pandemic. Included are benefits for both individuals and corporations as well as an extension to the U.S. tax filing deadline.
9. Your 2020 U.S. expat taxes are due April 15, 2021, with an automatic extension to June 15, 2021
The deadline to file your U.S. tax return is April 15, but U.S. citizens abroad are granted an automatic extension to June 15, 2021.
10. You can apply for a tax extension to extend your U.S. expat tax deadline to October 15
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.
11. If you have a Social Security Number and pay taxes, you are eligible for the Coronavirus stimulus checks
You may qualify for the Coronavirus stimulus checks if you fall within the income threshold, have a Social Security number, and file taxes as an expat. Retired expats and non-filers who live abroad may also qualify.
12. You’re still eligible for the stimulus checks if you haven’t filed your U.S. expat taxes in a few years or you owe either state or federal back taxes
Yes, you still qualify for the stimulus payments if you haven't filed in a few years or owe back taxes. That doesn't mean you'll automatically get it, though— see our expat Coronavirus stimulus check page to get the details. If you need to catch up on prior year returns, you can quickly get started with our Expat Tax Services today.
13. 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 $107,620 of your foreign earned income in tax year 2020.
- 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.
14. 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.
15. 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.
16. 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 taxes for expats.
17. 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.
18. 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.
19. 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.
20. When filing taxes for expats, 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 retirement investment accounts abroad. They may be treated differently than their U.S. counterparts, drastically changing your tax liability. For example, some types of overseas accounts require more documentation than others to stay in compliance.
It’s critical to 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 retirement and 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.
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.