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All information presented should be considered general in nature and not advice as to a specific situation.
General Rule
If you are a US citizen or permanent resident living abroad, you must still file and pay US income taxes. In general US expatriates must report their world-wide income to the IRS.
All of your income must be reported. It doesn't matter where the income was earned, whether the income was paid in a foreign currency, whether you have already paid taxes to a foreign government or how long you have lived abroad.
The good news is that you may be eligible for exclusions and credits which often offset all the tax liability and may even result in a refund of taxes already paid. However you have to file a return to claim the exclusions and credits and to get a refund of taxes paid.
All of your income must be reported. It doesn't matter where the income was earned, whether the income was paid in a foreign currency, whether you have already paid taxes to a foreign government or how long you have lived abroad.
The good news is that you may be eligible for exclusions and credits which often offset all the tax liability and may even result in a refund of taxes already paid. However you have to file a return to claim the exclusions and credits and to get a refund of taxes paid.
Filing a Tax Return
In most cases, you must file a US tax return even if no tax is due.
If you are supposed to file a tax return and fail to do so, the IRS may not allow the tax exclusion for working abroad and may assess you for taxes, penalties and interest for prior years. The end result is you can end up owing substantial amounts that would not have been due at all had you filed a return to begin with.
There is no time limit on how far the IRS can go back when you do not file.
Filing a return, even if no tax is due, begins the statute of limitations and in most cases limits how far the IRS can go back to audit.
If you are supposed to file a tax return and fail to do so, the IRS may not allow the tax exclusion for working abroad and may assess you for taxes, penalties and interest for prior years. The end result is you can end up owing substantial amounts that would not have been due at all had you filed a return to begin with.
There is no time limit on how far the IRS can go back when you do not file.
Filing a return, even if no tax is due, begins the statute of limitations and in most cases limits how far the IRS can go back to audit.
Filing Back Tax Returns
If you were supposed to file a tax return for prior years and did not , it's not too late. If no tax was due, there will likely be no penalties or interest assessed.
If you file back taxes before you are caught, the IRS will generally still allow you to claim the foreign tax exclusion although this policy is subject to change.
Your taxes are filed on Form 1040, the same form that you would use if you lived and worked entirely in the US.
If you file back taxes before you are caught, the IRS will generally still allow you to claim the foreign tax exclusion although this policy is subject to change.
Your taxes are filed on Form 1040, the same form that you would use if you lived and worked entirely in the US.
Information Sharing Between the US and other Countries
The US has treaties with many other countries for the sharing of tax information. The IRS may obtain financial information about US citizens living abroad and foreign governments may obtain information about their citizens living or having income in the US.
You can not assume that income earned abroad will not be discovered by the IRS.
You can not assume that income earned abroad will not be discovered by the IRS.
Foreign Earned Income Exclusions
Workers outside the US, either salaried (Form W-2) or self-employed, may claim an exclusion of of their earnings up to a specified amount (which varies by year).
This exclusion is available for years before 2008 but the amount is smaller. The exclusion is claimed by attaching Form 2555 to your Form 1040.
If there are two spouses and each works outside the US, each spouse may claim a separate credit. Example: for 2013, up to 2 x $97,600.
But again, you have to file a return to claim the exclusion. If you do not file and are caught, the exclusion may not be allowed at all.
An exclusion or deduction for housing costs in a foreign country is also allowed within certain limits.
This exclusion is available for years before 2008 but the amount is smaller. The exclusion is claimed by attaching Form 2555 to your Form 1040.
If there are two spouses and each works outside the US, each spouse may claim a separate credit. Example: for 2013, up to 2 x $97,600.
But again, you have to file a return to claim the exclusion. If you do not file and are caught, the exclusion may not be allowed at all.
An exclusion or deduction for housing costs in a foreign country is also allowed within certain limits.
Foreign Tax Credit
Foreign income taxes may either be deducted or claimed as a credit on your US income tax return.
Generally speaking a credit is more beneficial. A credit is a dollar for dollar offset to your tax liability as opposed to a deduction which reduces your taxable income.
The credit is claimed on Form 1116 and applies to anyone who pays foreign taxes whether living in the US or abroad.
The credit is limited however by several factors so many people do not receive a credit for all the taxes paid to a foreign government.
Generally speaking a credit is more beneficial. A credit is a dollar for dollar offset to your tax liability as opposed to a deduction which reduces your taxable income.
The credit is claimed on Form 1116 and applies to anyone who pays foreign taxes whether living in the US or abroad.
The credit is limited however by several factors so many people do not receive a credit for all the taxes paid to a foreign government.
State Income Taxes
If you lived in a state with an income tax before going overseas, generally you must continue to file and pay state income taxes.
Seven US states have no income tax: Alaska, Florida, Nevada, Texas, South Dakota, Washington, and Wyoming.
If you terminate your "tax domicile" in the state where you lived before moving overeas, it is possible to change your state of residence and avoid state income taxes altogether.
Each state has different rules. Changing your tax domicile may involve terminating all your connections with your previous state, for example bank accounts, voter registration, divers license, insurance, real estate ownership, church and social memberships, among other things. Not all states are this strict.
You should not plan on moving back to the state where you are terminating your residence.
If you are supposed to file state income taxes and fail to do so, you may be assessed for past due taxes, interest and penalties. There is no limit as to how far they can go back.
Seven US states have no income tax: Alaska, Florida, Nevada, Texas, South Dakota, Washington, and Wyoming.
If you terminate your "tax domicile" in the state where you lived before moving overeas, it is possible to change your state of residence and avoid state income taxes altogether.
Each state has different rules. Changing your tax domicile may involve terminating all your connections with your previous state, for example bank accounts, voter registration, divers license, insurance, real estate ownership, church and social memberships, among other things. Not all states are this strict.
You should not plan on moving back to the state where you are terminating your residence.
If you are supposed to file state income taxes and fail to do so, you may be assessed for past due taxes, interest and penalties. There is no limit as to how far they can go back.
Foreign Bank Account Reporting
If you have signature authority over a bank, securities or other financial account in a foreign country and the combined value of the accounts at any time during the year was more than $10,000, you are required to complete and file Treasury Department Form FBAR Form 114. It does not matter in which country or countries the accounts are located.
Please see the Foreign Bank Accounts page in the index for more information.
Please see the Foreign Bank Accounts page in the index for more information.
Social Security and Self Employment Taxes
If you had $400 or more of net self employment income, you must pay self employment tax. If you are employed by a US employer and work abroad, social security (and medicare taxes) must be paid on your wages.
You may be liable for social security and self employment taxes on foreign earnings even if the income is excluded under the Foreign Earned Income Exclusion.
You may also have to pay the equivalent of social security in the foreign country where you are working.
The US has treaties with certain countries (called Totalization Agreements) to eliminate the dual imposition of social security taxes and also to make sure that benefits are earned and paid to retirees who have spent significant amounts of time during their careers working overseas. Totalization agreements have been negotiated with most countries in Western Europe plus Canada, Japan and certain other countries.
You may be liable for social security and self employment taxes on foreign earnings even if the income is excluded under the Foreign Earned Income Exclusion.
You may also have to pay the equivalent of social security in the foreign country where you are working.
The US has treaties with certain countries (called Totalization Agreements) to eliminate the dual imposition of social security taxes and also to make sure that benefits are earned and paid to retirees who have spent significant amounts of time during their careers working overseas. Totalization agreements have been negotiated with most countries in Western Europe plus Canada, Japan and certain other countries.
Non Resident Tax Returns
If you are not a citizen or resident of the US but have US source income you may also be required to file and pay US taxes.
The key difference is that for non-citizens or non-residents, US taxes are paid only on US source income as opposed to US citizens or permanent residents ("green card" holders} who must report world-wide income.
The non-resident tax form required is Form 1040NR.
In addition to complying with US tax law, non-residents must comply with tax treaties that are in place with various countries and which override US tax law.
In addition sometimes a person's residence or citizenship status can change in mid-year in which case reporting as a dual status alien may be required.
The key difference is that for non-citizens or non-residents, US taxes are paid only on US source income as opposed to US citizens or permanent residents ("green card" holders} who must report world-wide income.
The non-resident tax form required is Form 1040NR.
In addition to complying with US tax law, non-residents must comply with tax treaties that are in place with various countries and which override US tax law.
In addition sometimes a person's residence or citizenship status can change in mid-year in which case reporting as a dual status alien may be required.
Our Tax Services
We hope this brief overview of international tax issues has helped explain some of the tax issues faced by people with income earned in foreign countries.
Please contact us if we can be of assistance in preparing any of your income tax returns. If you haven't filed returns for prior years and should have, we can also help with that.
Our fees are reasonable and we offer prompt and friendly service.
You may contact us by phone, fax or email so we can talk about your specific situation. Email may work best because of time zone differences.
We will be happy to provide an initial consultation, discuss your situation and answer short tax questions at no fee.
Please contact us if we can be of assistance in preparing any of your income tax returns. If you haven't filed returns for prior years and should have, we can also help with that.
Our fees are reasonable and we offer prompt and friendly service.
You may contact us by phone, fax or email so we can talk about your specific situation. Email may work best because of time zone differences.
We will be happy to provide an initial consultation, discuss your situation and answer short tax questions at no fee.
Information Needed to Prepare a Return
After we know a little bit about your specific situation, we will let you know what information we need to get from you to prepare your tax return(s).
In general the information needed includes:
In general the information needed includes:
- Your contact information. This is so we will be able to ask you questions if any arise.
- A copy of your most recently filed Federal and state tax returns.
- If you have not filed all years, why and what was the most recent year you did file?
- Any tax information forms such as W-2, 1099, 1098, K-,1 etc. (or the foreign equivalent)
- In addition we will either ask you more specific questions or send you a questionnaire to complete.
Our Fees
Our fees are reasonable and depend on the complexity of the return.
After getting some information from you, we can give you an estimate for your return.
After getting some information from you, we can give you an estimate for your return.
Filing a Return
If we can't e-file for any reason, we will email your returns for you to print, sign and mail to the IRS.
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All information presented should be considered general in nature and not advice as to a specific situation.