If you’re a US citizen living abroad with questions about what the expat tax filing requirements are, you’re not alone. Some expats aren’t even aware they need to continue filing US tax returns while living overseas.
Expatriate tax is a complicated realm for Americans overseas. For one, expats must often claim exemptions or credits to avoid double taxation. On top of that, they may also have to report foreign-registered businesses, bank accounts, investments, and other assets.
Luckily, the Bright!Tax team specializes in helping Americans abroad navigate the complicated world of US expat taxes. We’re here to shed some light on 12 key important pieces in the process.
Expatriate tax and US reporting requirements
1. Earned income
Almost every other country in the world taxes either a) those who live in the country or b) those who earn income originating from that country.
The US, however, taxes every US person (both American citizens and permanent residents/Green Card holders) on their worldwide income. Even folks living abroad who have never lived in the US or held an American passport could be on the hook for US taxes if they were born on American soil (including military bases) or have an American parent.
All US persons filing as ‘single’ or ‘married filing separately’ must file a federal US tax return using IRS Form 1040 if their total earned income exceeds $13,850 in 2023.
For married couples filing jointly, that minimum changes to $27,700. However, there are some circumstances in which the minimums are even lower. For example, if you’re self-employed and make $400 or more, you must file a US tax return. Additionally, if you are a US person married to a foreigner and filing separately, or vice versa ($5). If you’re not sure if you meet the tax filing requirement for your situation, check out our post about the minimum filing thresholds for various expat circumstances.
All figures on your tax return must be converted into US dollars. Make sure to use a reputable currency conversion calculator such as the US Treasury Reporting Rates of Exchange (1). Whichever you choose, take care to use the same throughout for consistency’s sake.
Social Security and Medicare taxes for expats
Some American expats who work abroad may also need to pay US Social Security and Medicare taxes on their earned income. For example, self-employed US expats and those who work for a US-based employer must file an expat tax return.
For the 2023 tax year, the rate for expat employees is 7.65%. Self-employed expats, however, are responsible for both the employer and employee contribution, meaning that the total is double, (15.3%).
Let’s look at the breakdown side by side:
The earned income mentioned above includes everything you have actively earned from your employer(s) and any clients (if applicable), as well as certain benefits (such as from a union strike or disability benefits). However, you must also report passive income as well.
Passive income is also called “unearned income” and refers to income you didn’t actively work for. This includes income gained through investments, interest, and payments, among other forms of unearned income.
Common forms of passive income US expats may owe taxes on include retirement plan payments, income from foreign rental properties, and Social Security payments (in some circumstances).
3. Foreign accounts
Beyond reporting your worldwide income, you may also need to report your foreign account holdings via a Foreign Bank Account Report, or FBAR.
This filing requirement applies to US taxpayers who have accumulated $10,000 or more (in total) across qualifying foreign financial accounts at any time in 2023. The FBAR is filed using FinCEN form 114.
Qualifying financial accounts include checking, savings, investment, and pension accounts (most of the time). If you have control or signatory authority over any other account, such as a joint or business account, you must report those as well — even if they aren’t in your name.
FBARs for the 2023 tax year are nominally due by April 15, 2024, but expats receive an automatic extension until October 15, 2024.
4. Foreign assets
The Foreign Account Tax Compliance Act (FATCA), signed into law in 2010, helps the US prevent tax evasion for people using foreign accounts. FATCA requires Americans to report significant foreign financial assets on IRS Form 8938 each year. For those abroad, the minimum reporting threshold starts at $200,000 for expats, but it can vary in some circumstances. (Find out everything expats need to know about FATCA.)
A word of caution: Penalties for individuals who fail to file this form, if necessary, can be steep (up to $10,000 per year for a maximum of $50,000). Furthermore, foreign financial institutions are required to report American clients’ information to the US government, so it’s important to get caught up and stay compliant if you haven’t already done so.
(More information on a penalty-free way to catch up is detailed below!)
5. Foreign businesses
Expats’ foreign business interests are also subject to US reporting and possibly taxation. All foreign-registered corporations that are a) owned by Americans who own at least 10% of the company and b) not considered disregarded must be reported on Form 5471 annually. If it is part of a foreign-registered partnership, however, it should be reported on Form 8865.
Those with a foreign-registered LLC must file IRS Form 8832 initially and then Form 8858 annually before it can be classified as a “disregarded entity,” as US-registered LLCs automatically are. Once your LLC is considered disregarded, the tax reporting will be included as part of your personal tax return.
And remember, any accounts associated with a foreign-registered business that you have control or signatory authority over also must be reported on the FBAR.
Additional expatriation tax filing requirements for Americans Living abroad to keep in mind
6. State & local taxes
Most states require you to pay taxes if you retain significant ties via property, investments, voter registration, dependents, etc. The exact tax rate and requirements, though, vary quite a bit from state to state.
By that token, if you don’t have significant ties, and can demonstrate that you live abroad, many states will not require you to file an expat tax return. A handful of states, however — Virginia, California, New Mexico, and South Carolina in particular — require you to keep paying taxes unless you a) change your residency to another state or b) prove that you will never return.
On the other hand, some states don’t tax income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. There are a couple of special cases, too. Recently, Washington passed a 7% tax on capital gains income above $250,000 a year. New Hampshire, meanwhile, taxes investment and interest income, although these taxes will be phased out for the 2023 tax year.
And while there are relatively few areas in the country that levy local taxes, they do still exist. So, make sure to look up the tax obligations of the last place you lived to avoid any surprises down the road.
7. Foreign taxes
Depending on which foreign country you reside in and/or earn income from, you may also be subject to foreign taxes. However, the US has several tax treaties in place designed to prevent Americans living abroad from being double-taxed on the same income.
These treaties stipulate that expats living abroad for a short time (typically three to five years) should continue paying social security taxes to the US but not to the country in which they reside. If they will be living abroad for longer, they should pay these taxes to the country in which they reside, but not to the US.
Unfortunately, thanks to a tricky clause, very few US expats benefit from US tax treaties. Expats who can benefit from a tax treaty provision should claim it on Form 8833.
IRS provisions to use when filing taxes for expats
8. The Foreign Tax Credit
If you aren’t able to benefit from a tax treaty, you’re not completely out of luck. The US offers a couple of programs that ease the burden of US expat taxes, like the Foreign Tax Credit (FTC).
The FTC essentially allows expats to subtract what they’ve paid in taxes to foreign governments from what they owe the US. And because so many countries have a higher income tax rate than the US does, this often reduces your US tax bill to 0.
Note, however, that these taxes must be:
- based on your foreign-earned income
- charged to you specifically to qualify for the FTC.
To claim the FTC, Americans living abroad must file IRS Form 1116 along with their annual return.
9. The Foreign Earned Income Exclusion (FEIE)
Another IRS provision that can help expats lower, and often eliminate, their tax bill is the Foreign Earned Income Exclusion (FEIE), which allows expats to exclude a certain amount of income from taxation.
For the 2023 tax year, the eligible exclusion amount is $120,000.
For the 2024 tax year is increased to account for inflation. Expats can exclude up to $126,500 on their 2025 tax return.
It’s important to note that the FEIE can only be applied to earned income, not passive/unearned income. Additionally, you cannot apply both the FEIE and the FTC to the same income.
However, you may be able to apply each of them to different incomes if it’s beneficial to do so.
To qualify for the FEIE, you must meet one of two tests:
- The Bona Fide Residence Test requires an expat to prove that they were a permanent resident in another country. This is achieved through official documents like visas, rental contracts, or foreign tax returns (among others).
- The Physical Presence Test requires expats to prove they spent at least 330 days outside of the US. This window of time doesn’t necessarily follow a calendar year. It can be 330 days in any 360-day period.
To claim the FEIE, file IRS Form 2555.
As a bonus, if you’re eligible for the FEIE, you’re also eligible for the Foreign Housing Exclusion (FHE). The FHE allows you to exclude the value of qualified housing expenses like rent, utilities, and necessary repairs from taxation. Any fees arising from foreign property that you own (like mortgage payments or property taxes) don’t fall into this category, but just like in the US, they are tax deductible.
10. Other common tax breaks
US expats are eligible for many of the same expatriate tax breaks as Americans who reside within the country. This includes a variety of tax credits, exclusions, and deductions, such as the:
- Child Tax Credit: Gives you a $2,000 tax credit per qualifying dependent child living with you if your income is at or below the given threshold ($400,000 for joint filers, $200,000 for other filers)
- Student Loan Interest Deduction: Allows you to deduct up to $2,500 in interest paid on qualified student loans
- Medical Expenses Deduction: Allows you to deduct qualified medical expenses above 7.5% of your adjusted gross income
You can research other common tax breaks online, but the best way to ensure that you don’t miss out on any is to work with a tax professional.
Navigate expatriate taxation like a pro (or with one!)
11. Catch up on your US taxes with the Streamlined Procedures
Behind on your US taxes? Don’t panic — the IRS has a voluntary amnesty program called the Streamlined Procedures. It allows expats who qualify for the program to catch up without financial penalty.
The Streamlined Procedures requires expats to
- File their last three annual tax returns
- Submit their last six FBARs
- Self-certify that their previous non-compliance was non-willful.
This program is only available voluntarily, however. In other words, you must reach out to the IRS first to take advantage of the program. Don’t let them beat you to it!
When filing taxes for expats retroactively via the Streamlined Procedures, the program also lets them retroactively claim any exemptions or credits from previous years to minimize or eliminate their US tax bill.
12. Seek assistance
Let’s quickly review a couple of key points when it comes to taxes for expats:
- With the passing of FATCA, the IRS is now able to enforce US tax filing globally more easily than ever.
- Due to recent legislation, the IRS has increased funding and plans to hire additional agents to enforce compliance.
While this may feel scary if you’re just getting started (or have accidentally fallen behind!), expatriate tax is complicated by nature. Fortunately, the best expat tax service may be just a click away.