Grasping U.S. Tax Responsibilities for Americans Residing Overseas

Introduction

If you’re a U.S. citizen or resident alien living abroad, understanding your tax responsibilities can be a daunting task. The U.S. is one of the few countries that tax its citizens on their worldwide income, regardless of where they reside. This means that even if you live in another country, you may still be required to file and pay taxes in the U.S. In this blog post, we’ll explore the key aspects of U.S. taxes when living abroad and discuss how to meet your filing obligations.

Foreign Earned Income Exclusion (FEIE)

One of the main tax provisions for U.S. citizens and resident aliens living abroad is the Foreign Earned Income Exclusion (FEIE). If you qualify, the FEIE allows you to exclude a certain amount of your foreign earned income from your U.S. taxable income. For 2021, the maximum exclusion amount is $108,700, and it’s adjusted annually for inflation. To claim the FEIE, you must meet the Bona Fide Residence Test or the Physical Presence Test.

Bona Fide Residence Test

The Bona Fide Residence Test requires you to be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. You must demonstrate that you have established a permanent residence in the foreign country and have no immediate intention of leaving.

Physical Presence Test

The Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days during a consecutive 12-month period. This test is based solely on the number of days you’re present in the foreign country, and you do not need to establish a permanent residence.

Foreign Tax Credit

If you pay taxes in a foreign country, you may be eligible to claim the Foreign Tax Credit on your U.S. tax return. This credit is designed to prevent double taxation and can help reduce your U.S. tax liability. To claim the Foreign Tax Credit, you must complete IRS Form 1116 and attach it to your tax return.

Foreign Bank Account Reporting (FBAR)

U.S. citizens and resident aliens with foreign financial accounts may be required to file a Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). You must file an FBAR if the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the calendar year.

Foreign Account Tax Compliance Act (FATCA)

Under the Foreign Account Tax Compliance Act (FATCA), certain U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report these assets to the IRS. This is done using Form 8938, which should be attached to your annual tax return.

State Tax Obligations

It’s important to note that some U.S. states have their own tax filing requirements for residents living abroad. You should consult with a tax professional to determine if you have any state tax obligations based on your specific circumstances.

Tax Treaties

The U.S. has tax treaties with many foreign countries, which can provide additional tax benefits for U.S. citizens and resident aliens living abroad. These treaties can help reduce or eliminate double taxation and may provide additional tax relief. It’s essential to review the provisions of any applicable tax treaty to understand your specific tax situation.

Conclusion

Understanding U.S. taxes when living abroad is crucial for U.S. citizens and resident aliens to remain compliant with their tax obligations. By familiarizing yourself with the key provisions, such as the Foreign Earned Income Exclusion, Foreign Tax Credit, FBAR, and FATCA, you can minimize your tax liability and avoid penalties.