Living or traveling outside the United States does not exempt U.S. citizens and residents from their tax filing obligations. In fact, the rules and requirements for filing income tax returns, estate tax returns, and gift tax returns, as well as paying estimated taxes, remain largely the same as for those residing within the country. This blog aims to shed light on the key filing requirements and considerations for U.S. taxpayers abroad.
Income Tax Return Filing Requirements
The primary determinant of whether you must file an income tax return is your gross income from worldwide sources. Generally, if your gross income exceeds the filing threshold based on your filing status and age, as outlined in the filing requirements table in Chapter 1 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, you are required to file a return. If you are a dependent of another taxpayer, refer to Chart B in the instructions for Form 1040 and Form 1040-SR for specific guidance.
Foreign Currency Considerations
If you receive income or pay expenses in foreign currency, you must convert those amounts into U.S. dollars when reporting them on your U.S. tax return. The IRS provides guidance on currency conversion and exchange rates to ensure accurate reporting.
Gross Income Calculation
Gross income encompasses all income received in the form of money, goods, property, and services, unless specifically exempt from taxation. Importantly, any income you exclude as foreign earned income or as a foreign housing amount must still be considered when determining your gross income for filing purposes. If you are self-employed, your gross income includes the amount reported on the Gross Income line of Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
Additional Filing Requirements
Beyond the standard income tax return, U.S. taxpayers abroad may have additional filing obligations depending on their financial circumstances. For instance, if you have an interest in specified foreign financial assets with a value above the applicable reporting threshold, you may be required to file Form 8938, Statement of Specified Foreign Financial Assets. Additionally, if you made contributions to or received income from a foreign trust, or received a gift from a foreign person, you may need to file Form 3520 or Form 3520-A.
Report of Foreign Bank and Financial Accounts (FBAR)
If you had a financial interest in, or signature or other authority over, any foreign bank, securities, or other financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, you must file FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), formerly known as TD F 90-22.1. This requirement does not apply if the assets are held with a U.S. military banking facility operated by a U.S. financial institution or if the combined assets in the account(s) are $10,000 or less throughout the entire year. The FBAR must be filed electronically through the BSA e-file system.
Staying compliant with U.S. tax filing obligations while living or traveling abroad can be complex, but it is crucial to avoid potential penalties and maintain good standing with the IRS. By understanding the specific requirements and seeking professional guidance when needed, U.S. citizens and residents abroad can navigate these responsibilities effectively.