US residents referred as expats are required to file US income tax returns just like any other individuals living in the USA.
The American tax for US residents living abroad has different tax obligations because of their international status.
For IRS both expats and American residents living in the country are both same when it comes to taxation. So, if you are an US expat, you are required to file an income tax return using Form 1040 in the same way as Americans residing in USA.
Do expats have tax exemption?
US citizens living abroad are eligible for Foreign Earned Income Exclusion or the Foreign Tax Credit. The FEIE allows one to exclude a certain amount of foreign earned income from US taxation. The FTC provides a credit for taxes paid to foreign country that can offset the US tax liability.
What tax form does expat have to file?
The American expats have to file Form 1040 the same form used by the tax payers of USA. There are additional forms and schedules that include Form 2555 and Form 1116.
Paying expat taxes on money earned abroad
- Form 1040 – Expats must report their world-wide income including the one earned abroad. This includes income from employment, self-employment, investments, rental properties, and other sources of income.
- Claim exclusions and credits: Expats if they are eligible can use various provisions to eliminate or reduce US taxes on their foreign earned income. The most common is FEIE that allows one to exclude a certain amount of foreign income from US taxation. They can also claim Foreign Tax Credit in one has paid taxes to foreign government on same income.
- Report foreign financial accounts: If expats have foreign bank account or other financial assets that exceed certain limits they have to file FinCEN Form 114 and IRS Form 8938 to report these assets.
- File state income tax: Based on US state of residence and the state tax laws, one may need to file state income tax returns on the foreign earned income.
Declaration of income from abroad
To declare income earned abroad one must report on their US tax return. This includes income from employment, self-employment, investments, rental properties and other sources. The expats will need to provide detailed information about their foreign income including amount, source and currency.
How to avoid double taxation?
One of the main concerns of expats is to avoid double taxation- taxed by both the US and the foreign country where they have settled and earn their income.
To avoid double taxation, tax specialists develop strategies that optimize the use of tax credits and exclusions including FEIE and FTC for their clients.
also read:- How much foreign income is tax –free in USA?
The American Tax for US residents living abroad is complex. Any flaws or delay in filing the expat returns can invite huge IRS fines. It is therefore advisable to collaborate with a professional expat tax expert to help you navigate the expat tax matters easily.
FAQs
1. Does USA expats have to file tax returns with the IRS?
Yes, expats have to file tax returns with the IRS as their income earned at any part of the world is taxable.
2. Can IRS track foreign income?
Yes, IRS has mechanism to track foreign income and financial accounts of their citizens including expats.
3. Can expats avoid double taxation?
Yes, they can by using tax credits, exclusion that includes FEIE and FTC.