Americans Abroad: What is Expatriate Tax?

By ZM Ishmurzina

The increasing number of Americans move abroad whether for work, retirement and other reasons. The common misconception among US expats is that they are not required to file US expatriate tax returns because they pay overseas taxes. The truth is that American expats are taxed on their worldwide income whether they live in London or New York. This article covers the most popular questions like what is expatriate tax and other overseas tax issues like what is foreign earned income exclusion, foreign housing exclusion, foreign tax credit, tax treaties, social security agreements, FBARs and US expat tax filing due dates.

This is the latest email from one of our clients, American expats living abroad. “I moved abroad in 2008 for work. I have just learned that I have to file an American tax return every year in addition to FBARs. This is news to me because I pay overseas taxes every year in France. I would like to understand what is expatriate tax and the basics of filing US expatriate tax return as an American living abroad. Moreover, I need to know how I can file late expat tax returns under IRS streamlined program. Finally, I wonder whether you provide US expatriate tax services”.

Expatriate Tax Basics for Americans living Abroad

US Expat Tax Return Due Dates

US expats are required to file American tax returns if they meet the filing requirements. What is expatriate tax due date? Americans living abroad get an automatic extension until June 15 to file a US expatriate tax return on overseas taxes. However, any tax due must be paid in full by April 15 to avoid any interest. American expats must file form 4868 to request an additional extension until October 15.

Tax Tips to minimize US tax liability

What is expatriate tax exclusion? Americans living abroad can eliminate the effect of overseas taxes and double taxation by utilizing 3 IRC provisions:

  • Foreign earned income exclusion. American expats can exclude up to $97,600 in 2013 if they have the foreign earned income and meet either the bona fide test or physical presence test. Foreign earned income includes wages, salary or self-employment income that is earned overseas. Dividends, capital gains, rental income and other types are considered a passive income.
  • Foreign housing exclusion. US expats can also exclude eligible foreign housing expenses like rent, utilities etc if they can claim the foreign income exclusion.
  • Foreign tax credit. If American expats pay overseas taxes, they can claim foreign tax credit on US expatriate tax return and minimize expatriate tax liability on a dollar-for-dollar basis on 1116 Form. Also, US expatriates can take a deduction on Schedule A for overseas taxes paid.

Americans living abroad must file a US expatriate tax return on overseas taxes to claim Foreign Income Exclusion, Foreign Housing Exclusion and Foreign Tax Credit. Moreover, if the IRS files a US tax return on behalf of a taxpayer, the IRS agent will prepare a basic return without any deduction or exemptions. So it is essential that American expatriates file a US expatriate tax return on a timely basis.

FBAR

Americans living abroad must file the FBARs, form TD F90-22.1, if the aggregate value of their foreign financial assets exceeds $10,000 at any time during the year. The FBAR is due by June 30. There is no extension for the FBAR. Effective July 1, 2013 the FBAR must be e-filed. What is expatriate tax penalty? There are significant penalties starting from $10,000 and even a jail time for a failure to file the FBAR.

Tax Treaties and Social Security Agreements with Foreign Countries

The USA signed tax treaties with 66 countries as well as social security agreements with 24 countries. Tax treaties have been created to mitigate the effect of double taxation and cover a wide range of topics including income taxes, inheritance taxes, pensions and other issues. Under treaties some types of income might be taxed at reduced rates or even be exempt from US taxes. Americans living abroad can receive social security benefits. Additionally, they might be subject to social security taxes in addition to paying overseas taxes.

Self-employed American Expats

American expatriates with self-employment income can receive a Certificate of Coverage if they work in one of the countries that signed a social security agreement with the USA. Some self-employed US expats may be required to pay Social Security and Medicare taxes as a part of US expatriate tax returns.

Are Americans expats living abroad subject to Affordable Care Act (Obamacare) requirements?

To learn more about Obamacare requirements for American expats, please click on the link.

Late Tax Filing

Americans living abroad who haven’t filed US expatriate tax returns on overseas taxes for multiple years should review the IRS streamlined program for Nonresidents or the Offshore Voluntary Disclosure Program. What is expatriate tax streamlined program? The IRS streamlined program has been introduced on September 1, 2012 and currently does not have a deadline. However, the IRS mentioned many times that it might end at any time so American expats are encouraged to go through this program if they have a simple tax return and owe less than $1,500 in taxes. The Offshore Voluntary Disclosure Program might be a better choice for US expats who want to avoid a criminal prosecution.

Conclusion

There are the basic expatriate tax issues that American expats must be aware of. Americans living abroad who need additional assistance should seek help of a CPA that specializes in US taxes for expats. International tax experts at Artio Partners are here to help you with overseas tax issues. We provide a full range of US expatriate tax services.