By Alan Sasserath and Michael O’Brien
Working abroad is an opportunity many adventurous Americans find glamorous and exciting, with the chance to live and explore a foreign country often viewed like a working vacation. Taxes have to be filed, work has to be done, and meetings must be attended, but everything feels a bit more enjoyable than back in the States
Americans who live and work overseas are colloquially known as expatriates. For tax purposes, expatriates, or expats, are generally defined as U.S. citizens or resident aliens who temporarily, or for an extended period of time, reside in a foreign country. Expatriates who voluntarily give up their U.S. citizenship or greencard status are much less common and are subject to special rules. For an expatriate on foreign work assignment, the question of yearly taxes – what to file, where to file, and what can be excluded or deducted due to living abroad – can be one of the most complicated and stressful parts of living abroad. But it doesn’t have to be.
Here are some simple tips any American living and working overseas should keep in mind when filing their personal taxes.
1. What to File
The simplest way to ensure your taxes are properly filed while living and working overseas is by engaging a tax professional with experience in both domestic and international tax law. Your tax professional should have expertise in dealing with all aspects of a domestic and international tax situation so that they are fully equipped to handle any difficulties which may arise. This way you don’t have to!
Additional help for taxpayers who live outside the U.S. can be found at https://IRS.gov/uac/Contact-My-Local-Office-Internationally, and the professionals at Sasserath & Zoraian are available to assist with any questions or concerns you may have.
Please note that U.S. taxes are based on residence as well as citizenship status. Therefore, it is also important for expats to comply not just with the requirements of the federal government, but with the tax claims of their previous U.S. state as well. Some states require expats to file and pay income tax even if they don’t plan to move back for several years, and many states, including the commonwealths of Massachusetts and Virginia, make it difficult to give up tax residency. Remember to check with your state for all requirements and be aware that although there may be federal exemptions for expats, those same exemptions do not necessarily apply to the states.
2. Federal Exclusions for Foreign-Earned Income
If an expat earns income and maintains full-time residence abroad for the entire year, the Foreign Earned Income Exclusion (FEIE) allows you to exclude a certain threshold amount of your foreign earned income from your U.S. taxes. For tax year 2019, the exclusion amount was $105,900, and the FEIE usually increases incrementally on a yearly basis ($107,600 for 2020). Please consult your tax professional or check IRS guidelines for current thresholds. To claim this exemption, you are required to fill out IRS Form 2555. Another tip: if an expat is married and his or her spouse also earns income while residing abroad, they may exclude the threshold amount of additional income from U.S. taxes as well.
3. Reporting foreign bank accounts to the U.S. Department of Treasury
In 2010, the U.S. government passed the Foreign Account Tax Compliance Act (FATCA), which allows the government to monitor and track down all money earned or invested by Americans overseas. Therefore, it is very important for U.S. citizens and resident aliens residing abroad to report all earned income located in foreign accounts, i.e., non-U.S. accounts, to the IRS each year. Otherwise you may be held liable for criminal prosecution under the law due to evading taxes. The foreign bank account reporting deadline tracks the April 15 tax return filling deadline, with an automatic extension to October 15. Expats should file FinCEN Form 114 by April 15 of each calendar year if the total combined balance in all foreign accounts exceeds $10,000 at any point during the tax year being filed. If you own (directly or indirectly) investments in any foreign corporation, or own foreign mutual fund shares, you may also be required to file IRS Form 5471 for owning an interest in a controlled foreign corporation or IRS Form 8621 for owning part of a passive foreign investment company (PFIC). Other information reporting forms such as Form 8938 (Statement of Specified Foreign Financial Assets) or Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) could also apply in certain situations. Again, please consult us for guidance.
4. Extensions to File
Working and living abroad can be complicated at times, and both federal and state governments are aware of this. Therefore, they allow certain deadline extensions for expats filing their U.S. taxes. You are allowed an automatic 2-month extension to file your tax return and pay any federal income tax due if you are a U.S. citizen or resident alien living outside the U.S. and your main place of business or post of duty is outside the U.S., or if you are in the military or naval service currently on duty outside the U.S. You will, however, be required to pay interest on any tax not paid by the regular due date of April 15. To request this extension, you must attach a statement to your tax return explaining which of the two situations you qualify for.
You may also receive an automatic 6-month extension to file when you complete IRS Form 4868 by the original due date of your return, April 15. However, note that this is not an extension of time to pay. If requesting a 6-month extension to file your return, you must still make an accurate estimate of taxes owed, based on the information available to you at the time of your original filing date, and remit payment. Additional exceptions and deadline extensions are available, and you should speak with your tax professional or the IRS directly to discuss them.
Filing your tax returns as an expatriate doesn’t need to be a long or complicated process, as long as you are armed with the knowledge of where you need to file and what you need to declare. Working with an accounting firm experienced in assisting clients through both domestic and international tax filing is the safest and easiest way to make sure you’re complying with all regulations. And by keeping the above four tips in mind, you are well on your way toward making sure you meet all federal and state requirements while leaving yourself time to enjoy what really matters – your experience living and working abroad.
Please contact us for guidance on your specific situation.