Us Expat Tax: Everything You Need To Know

10 Aspects of U.S. Expat Taxes You Need to Understand as an American Living Abroad

The United States is one of the few countries that taxes its citizens on their worldwide income, regardless of where that income is earned or where they live. Greenback Expat Tax Services can help you understand the complex rules surrounding U.S. expat tax.

In this article, we will focus on the key areas of U.S. expat tax that you should know about. We also host a weekly series on our website that focuses on different elements of U.S. expatriate taxes (with emphasis on these topics and more), so be sure to check them out.

1. Exclusion of foreign-earned income
Eligible U.S. citizens living and working abroad can potentially save significantly on their expat tax returns by completing the Foreign Earned Income Credit form. To qualify, a U.S. citizen or resident alien must earn income in a foreign country, have a regular place of business outside the United States, and pass a lawful residence or physical presence test. This exclusion is requested on Form 2555 and attached to Form 1040. If you qualify for the Foreign Earned Income deduction on your U.S. expatriate tax return, you may also qualify for the Foreign Housing Credit, which allows you to deduct up to $27,450 in overseas housing expenses.

2. Foreign tax credit

It is common for U.S. citizens living abroad to be taxed both by the host country and the United States. The foreign tax credit was developed by the IRS to ease the burden of double taxation on US expatriates. U.S. citizens can claim a credit for foreign income taxes paid against U.S. expatriation taxes. This credit can be claimed on Form 1116 and can reduce your U.S. taxes by the amount you pay to a foreign government.

3. Understand the impact of foreign exchange. 

It is important to note that when filing a US expatriate tax return, all amounts must be reported in US dollars. The IRS wants each transaction to be converted into U.S. dollars at the current rate, but is also willing to accept an average annual percentage rate for many transactions. Depending on current exchange rate fluctuations, choosing the right method can result in significant tax savings for you and your family. For example, suppose you receive a bonus of 50,000 euros on May 20, 2010. Using the average annual rate for 2010, this bonus would be $66,225. However, using the daily rate of May 20, 2010, the bonus would be $61,335. As you can see, in this case, using the daily rate can save you a lot more in US expatriate taxes than using the annual average rate.

4: Double taxation problem

Similar to foreign tax credits, the United States has tax treaties with more than 50 countries to avoid double taxation of U.S. citizens living abroad. In general, contracts are intended to attribute an individual's income solely to the source of the income. For more information on the provisions of each treaty, see IRS Publication 901 to learn how these treaties affect your U.S. expatriate taxes.

5: Social Security

As an American living abroad, you are still entitled to Social Security benefits. The United States has agreements with 24 countries to eliminate double taxation and ensure benefit protections for recipients. The Social Security Administration issued Publication 05-10137 to help expatriates manage their Social Security benefits while residing in another country. Country-specific information is also available on the Social Security website. Visit www.SSA.gov and search for your specific state.

6: Do I need to file state taxes?
Each of the 50 states has different U.S. expat tax filing requirements. Some states, such as Florida, Texas, and Washington, have no income tax at all. On the other hand, some states, such as California and Virginia, consider whether you have certain rights as a U.S. citizen, such as asset ownership, financial accounts, driver's licenses that determine future "intentions," etc. Even if authorities determine that you intend to return to your previous state, you may still have to file a tax return.

7: Foreign bank account

If you are a U.S. citizen with one or more foreign accounts and the cumulative balance of those accounts exceeds $10,000 at any point in the calendar year, Form TDF 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) must be submitted. By June 30th of each year. This form is filed separately from the U.S. expat tax and must be received (not just postmarked) by the Treasury Department by June 30th.

8: Registration date

Typically, a US citizen must file her US income tax return by April 15th. However, U.S. citizens residing abroad are entitled to an automatic extension until June 15th to file their U.S. resident tax returns. Despite the automatic extension, all U.S. expatriation taxes will still apply. Amounts must be paid by April 18, 2011 to avoid interest.

9: Voluntary disclosure

The IRS is now offering people who may not have reported foreign financial accounts the opportunity to learn about U.S. expatriate taxes. This option ends on August 31, 2011. This initiative reduces fines and eliminates the possibility of criminal prosecution for those who do not comply with regulations. To keep U.S. expatriate taxes current, participants must file all original and amended tax returns and make all applicable payments of taxes, interest, and penalties by August 31, 2011. You need to do it.

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