Frequently Asked Questions about Expat Tax:
- I am a U.S. citizen living and working outside of the United States for many years. Do I still need to file a U.S. tax return?
Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits.
- I pay income tax in a foreign country. Do I still have to file a U.S. income tax return even though I do not live in the United States?
You have to file a U.S. income tax return while working and living abroad unless you abandon your green card holder status by filing Form I-407, with the U.S. Citizen & Immigration Service, or you renounce your U.S. citizenship under certain circumstances described in the expatriation tax provisions.
- I just realized that I must file U.S. income tax returns for prior years. How many years back do I have to file?
You must file a federal income tax return for any tax year in which your gross income is equal to or greater than the personal exemption amount and standard deduction combined (per the Form 1040 Instructions for the corresponding tax year). Generally, you need to file returns going back six years. This will depend on the facts and circumstances of your particular situation.
- What deductions and/or credits am I allowed on my U.S. income tax return as a U.S. citizen living and working in a foreign country?
U.S. citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a foreign tax credit on foreign income taxes or an itemized deduction for eligible foreign taxes. However, if you take the foreign earned income exclusion your foreign tax credit or deduction will be reduced.
If eligible, you can claim a foreign tax credit on foreign income taxes owed and paid by filing Form 1116 with your U.S. income tax return.
You may also be eligible for the foreign earned income exclusion.
- If my foreign earned income is below the foreign earned income exclusion threshold amount, am I still required to file a U.S. individual income tax return?
Yes, since the foreign earned income exclusion is voluntary, you must file a tax return to claim the foreign earned income exclusion. It does not matter if your foreign earnings are below the foreign earned income exclusion threshold.
There are specific requirements that you must satisfy to be eligible to claim the foreign earned income exclusion.
- Do I need to have a tax home in a foreign country in order to claim the foreign earned income exclusion?
Yes. To be eligible for the foreign earned income exclusion, you must have a tax home in a foreign country AND be a U.S. citizen or resident alien. You must also be either a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or you must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. U.S. citizens may qualify for the foreign income exclusion under either test. U.S. resident aliens must qualify under the physical presence test, unless they are citizens or nationals of a country with which the United States has an income tax treaty in effect. In that case, U.S. resident aliens also may qualify for the foreign earned income exclusion under the bona fide residence test.
Your tax home must be in the foreign country or countries throughout your period of bona fide residence or physical presence. For this purpose, your period of physical presence is the 330 full days during which you are present in a foreign country or countries, not the 12 consecutive months during which those days occur.
- Can foreign pensions be excluded on Form 2555?
Foreign pensions cannot be excluded on Form 2555. Foreign earned income for purposes of the foreign earned income exclusion does not include pensions and annuity income (including social security benefits and railroad retirement benefits treated as social security).
- Reporting of Foreign Financial Accounts
Who Must File a Report of Foreign Bank and Financial Accounts “FBAR”?
If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, and the aggregate value of financial accounts exceeds $10,000 at any time during the calendar year the Bank Secrecy Act may require you to report the account yearly to the U.S. Internal Revenue Service (IRS) by filing FinCEN Report 114, Report of Foreign Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1).
The $10,000 is a cumulative balance, meaning if you have a combined account balance of $12,000 at any one time (but divided between 2 accounts), both accounts would have to be reported.
The FBAR is not filed with your US Tax return. It MUST be electronically filed through the BSA E-File System
Who Must File a Form 8938 – Statement of Specified Foreign Assets?
U.S. citizens and residents with specified foreign financial assets with an aggregate value exceeding $50,000* must report them to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, attached to their federal income tax return.
Examples of Foreign Financial Assets include foreign financial accounts, foreign stock, foreign partnership interests, foreign mutual funds, foreign trusts, foreign-issued life insurance with cash value, foreign hedge/private equity funds, foreign real estate held by a foreign entity.
*Note: higher limits apply for married taxpayers and taxpayers living abroad
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