Many Americans living abroad in 2022 are unaware or confused about their U.S. tax filing obligations. The U.S. tax system is unusual because it imposes itself on the basis of citizenship. Almost all other countries tax either residency (so only people who live in that country have to report taxes there) or taxes based on income accumulated in that country, regardless of their residence (known as the territorial tax system). You may have U.S. tax filing obligations if you have personal income such as wages, salaries, commissions, tips, consulting fees, pension funds, alimony payments, U.S. and/or foreign social security, interest, dividends, capital gains, rental properties, farm income, royalties, inheritances, or benefits in kind in the United States or abroad. Expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and to long-term permanent residents (green card holders) who have terminated their residency in the United States. Form 8854 is used by individuals who have moved abroad to notify the IRS of their expatriation and to confirm that they have fulfilled all federal tax obligations for the 5 taxation years preceding the date of their expatriation.
We strongly recommend that expats seek advice from a U.S. tax consulting firm to find out what is most advantageous for them in order to minimize their taxes in their unique situation. When expats file from abroad, they need to convert their income earned abroad into US dollars. You can use any reputable currency conversion source for this, as long as it is consistent in the source you are using. If you`re a U.S. citizen living abroad, taxes are always something to consider, although it may be tempting to think you`ve escaped the usual state rush that comes with filing a federal tax return each April. However, contrary to popular belief, you are still required to file a U.S. federal tax return even if you move to a new country. In this article, we explain why.
Partner, CPA Director and Thought Leader at Bright! Tax Expat Tax Services, an award-winning U.S. tax provider for Americans living abroad. One problem that arises in this tax system is that a person could theoretically be taxed twice on their earned income – both from their current country of residence and from the United States. This scenario is particularly relevant for an American who lives abroad full-time and can be considered a resident in other local tax systems. In some cases where neither the foreign tax credit nor the exclusion of foreign work income can be applied, perhaps because their only income is passive and comes from the United States (for example. B U.S. pension or rental income), expats may have to pay U.S. taxes and then claim tax credits in the country where they live to avoid double taxation.
if available. When it comes to reporting your U.S. expat taxes, there are other points you need to report in addition to your earned income. The IRS also requires you to disclose your foreign accounts and assets that exceed a certain value threshold. Even your pension contributions in foreign pension accounts, which may appear tax-deferred, could be taxable! The FBAR (Foreign Bank Account Report) has been in existence since 1972 and should be filed if all your foreign assets are worth $10,000 or more at any time during the tax year, or if you have the right to sign one or more foreign accounts, para. B example if you are treasurer of an association or work in the accounting department of your employer and sign for payment. From 2014 and in the following years, the FBAR must be submitted electronically as a FinCen 114 form to the Ministry of Finance. It must be filed no later than April 15 of each year (at the same time but separately from Form 1040) with automatic renewal until October 15 if you live abroad.
Children are usually citizens or residents of the same country as their parents. If you were an American. Citizen, if your child was born, your child is usually a U.S. citizen. This also applies if the child`s other parent is a non-resident foreigner, if the child was born in a foreign country and if the child lives abroad with the other parent. Americans who retire abroad can have their U.S. Social Security checks transferred to a foreign bank if they wish, though they should check local tax regulations to make sure this doesn`t trigger an additional tax liability. Fortunately, while most U.S. citizens working abroad are required to file taxes, the tax rules for expats have evolved, so most expats don`t owe an amount at the end of the year. Called an exclusion from income earned abroad, it offers U.S. expats another way to reduce their U.S. tax bill to a threshold of $108,700 in 2021, even if they don`t pay foreign taxes.
The exclusion of income earned abroad must be claimed on IRS Form 2555 when filing U.S. tax returns. ==References=====External links===Citizens and resident aliens living outside the United States are generally allowed to make the same deductions as citizens and residents living in the United States. If you have paid or accumulated foreign taxes on foreign income in a foreign country and are subject to U.S. tax on the same income, you may be able to claim a foreign income tax credit or an individual deduction for eligible foreign taxes. However, if you claim the exclusion of income earned abroad, your foreign tax credit or deduction will be reduced. Most states will allow expats to stop filing tax returns once they prove they live abroad, but some states want to continue taxing expats who maintain ties to the state, such as real estate, investments, voter registration, or dependents. Americans living abroad with children in 2022 and taking advantage of the foreign tax credit may also be able to claim the child tax credit. ==References=====External links===Citizens and residents with certain foreign financial assets with a total value greater than $50,000 must report them to the IRS on Form 8938, Declaration of Specified Foreign Financial Assets, which is attached to their federal tax return. For more information about this list of certain foreign financial assets, see FATCA Information for Individuals.
No matter where in the world earned income is received, but if you are applying for the exclusion of foreign earned income, you must prove that you live abroad by passing one of the two IRS tests. In my experience, the main reason for this is ignorance: the majority of expats who do not file a file do not know that they have to. Maybe it`s because they assume the U.S. only taxes U.S. citizens, or because the U.S. has a tax treaty with the country they live in, or they may have heard that there is an exemption from automatic production if your income is less than $100,000. However, none of these assumptions are correct. If Social Security Tax and Medicare were mistakenly withheld from wages received that were not subject to tax, you must first contact the employer for a refund. Americans who live in America and have not declared their foreign bank accounts could face hefty fines. These could sometimes reach hundreds of thousands of dollars.
They were also charged with a criminal offence. Americans living abroad are now also actively screened (often for the first time). Fortunately, the U.S. government and its tax authorities (IRS) are taking this group into account. Americans who live abroad and were unaware of this law have the unique opportunity to file their tax returns under a special amnesty program. This avoids fines and is called a simplified procedure. Excluding income earned abroad is often a good provision for Americans abroad who earn less than the FEIE limit ($108,700 for the 2021 tax year), whose income is earned, and who do not pay foreign income tax (such as digital nomads who often migrate from one country to another without having tax residency anywhere) or pay foreign income tax at a rate lower than the U.S. rate. therefore, claiming the foreign tax credit would not completely eliminate their U.S. tax bill. The most sensible course of action for expats who haven`t filed an application abroad because they don`t know or fully understand the rules is to catch up with an IRS amnesty program called Streamlined Foreign Offshore Procedures as soon as possible.
The program requires them to file tax returns for the last three years and several years of the Foreign Bank and Financial Accounts Report (FBAR). An FBAR is another U.S. reporting requirement that affects many Americans with bank accounts or other types of financial accounts abroad. Citizenship-based taxation means that the U.S. reporting rules for Americans living abroad are the same as for Americans living in the states. If your global income exceeds the minimum thresholds, you will need to file a U.S. tax return. These thresholds start at just $5 of global income in a year for Americans who are married but file separate returns. In general, you are required to pay self-employment taxes if you are abroad and you are an independent U.S.
citizen or a resident alien. There is a Social Security and Medicare tax on net self-employment income of $400 or more per tax year. Your net income from self-employment is used to determine your net income from self-employment. .