The Internal Revenue Service does an extremely good job of making sure that Americans pay their taxes, including those living abroad.
Unlike some countries, the United States requires the vast majority of its citizens living abroad to file a tax return each year.
As complicated and time-consuming a process as completing a tax return can be normally, it can be even more complex and frustrating when foreign assets, property ownership and marital status enter the equation.
With the deadline for US citizens abroad approaching in mid-June, The Local asked Nathalie Goldstein, CEO of tax preparation software company MyExpatTaxes, some of the most common questions internationals have about their 2021 return.
Tax Basics
You will probably have filed a tax return before as a US citizen. However, you may be approaching your first tax deadline as a US citizen abroad. Here are a few things you need to know.
Who is obligated to file a US tax return?
“Americans and US Green Card holders whose income reaches the minimum income threshold regardless of where they live. This starts at $5 for those who are married to non US citizens and opt to file as Married Filing Separately.”
What are the likely consequences, should I miss filing a return?
“If you owe US taxes you will be charged penalties and interest on any unpaid amounts. Additionally the US could revoke your passport for failing to report your income if you owe more than $50,000 in unpaid taxes.”
Do I really get to file my tax return later than the April deadline as a US citizen living abroad? Do I need to request special permission for this extension?
“Yes. Anyone who is living outside the United States at the time of the tax deadline has until June 15th to file their tax return. You won’t need to request an extension but you will need to include a statement explaining why you qualify for the expat tax deadline. MyExpatTaxes automatically includes the statement when you file with us.
“However, if you will need to pay US taxes (which most Americans abroad won’t), you still need to pay by the April deadline.”
What are the types of documentation and records I should have ready when I start doing my taxes?
“You’ll need your income statements from the previous tax year (the one you are filing), as well as any deductions you plan to claim. You’ll also need your Social Security number, employer information, and your basic info such as birthdate and address.”
I am married to a non-US citizen. Do I file married – jointly or separately – or single?
“Most expats living in a foreign country will probably want to file as Married Filing Separately. Using this filing status keeps your spouse’s income out of the equation altogether.
“If you do file as Married Filing Separately, the minimum income threshold for filing a tax return is just $5. So make sure you file your return, even if you work just part-time or very minimally.”
How do I find the right exchange rates to use to convert my wages in my local currency to US dollars?
“The IRS posts the average annual exchange rates of several countries on their website. However, it’s not required to use these rates. If the rate is a publicly posted rate, simply select the rate which suits your specific situation the best.”
Overseas income and property
If you are living overseas as a US citizen, odds are that you earn a salary, or may even own property in your adopted country. This may have some impact on your tax return, depending on the nature of the income and property.
Am I supposed to pay any additional taxes to the US on my overseas income? What about retirement savings accounts and/or investment accounts where I currently live?
“Actually, it’s quite the opposite. You can use the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) to help you avoid paying any US taxes at all. The FEIE allows you to exclude around $100,000 of your foreign earned income (such as salary or self-employment income) from your tax return – meaning you won’t pay anything to the IRS for that income.
“Additionally, you may also get credit for any taxes paid to your resident country. This is why we say most Americans won’t pay US taxes – they just have to file! Of course if you don’t pay local taxes on passive income streams like investment accounts, then you might owe some tax to the US.”
Does owning property overseas have an impact on my US tax return? What should I know before buying, tax-wise?
“Owning property overseas is no different tax-wise than owning property in the US. When you rent or sell your property, you will need to report that income.
“For those selling property, if you qualify for it being your main home (you lived in and owned it for 2 of the last 5 years), you might be eligible to exclude up to $250,000 of the sale profit per taxpayer from your US tax return.”
Pandemic stimulus payments and taxes
Many US citizens were eligible for stimulus payments, released by the US government in response to the coronavirus pandemic that began in 2020. These may have some implications on the taxes you need to pay.
Will the pandemic and distribution of stimulus checks impact my tax return?
“There are a few ways the economic stimulus payments could affect your return:
- If you didn’t file for the last few years, it’s not too late to claim your stimulus payments.
– Assuming you owe less than the amount of the payments, you’ll receive any additional sum as a refund.
– If you had a child in 2021 and get their SSN by October 15, 2022 (assuming you filed an extension), you can claim the latest $1,400 stimulus payment for them. - If you are a parent who received advanced child tax credit payments in 2021
– If you, like me, use a US address when filing your taxes abroad, it’s possible you have received more in advance payments than you will qualify for. Since Americans abroad are only eligible for $1,400 per child (not the potential $3,600 that US residents can claim), if you received more than you were eligible for, you’ll need to pay this back when you file your taxes.
– If you received the correct sum, or nothing at all, you will receive any remaining portion as a tax refund.”
Reporting foreign accounts
US citizens are obliged under the law to declare assets in overseas accounts, over a set amount, in order to track funds and monitor and hinder tax avoidance. Come tax time, it’s important that you declare your accounts if they exceed the limit.
What is an FBAR and why is it necessary to file it?
“The FBAR or Report of Foreign Bank and Financial Accounts, is how the FinCEN (The Financial Crimes Enforcement Network) keeps tabs on US citizens who have money (and how much) in foreign accounts. Anyone who has more than $10,000 max combined in all their foreign financial accounts at any time throughout the tax year will need to file an FBAR.
“Things to note about the $10,000 limit: You need to add the sum of ALL of your foreign accounts. If the sum reached is over the limit, you need to file an FBAR.
“If your accounts are in a foreign currency, you’ll need to make sure you are converting the currency amounts to USD. MyExpatTaxes includes the FBAR for no additional charge – because we understand this is an essential form for expats like myself.”
Do joint accounts count towards the $10k combined total?
“Yes, you will need to include the entire sum of any account with your name on it or that you have signature authority over. For example, joint bank accounts, children’s accounts, and business accounts.”
When is the FBAR due? Do I need to request permission if I don’t send it in by the regular tax deadline in April?
“The FBAR is due April 15th. There is an automatic extension to October 15th. You don’t need to do anything to request the extension (except include a statement!)”
Do the FBAR and my income tax return need to be filed at the same time?
“It’s generally easiest to file them at the same time, but since your tax return is sent to the IRS and the FBAR is sent to FinCEN, you’re not required to complete them simultaneously.
“Again, this is where MyExpatTaxes can really help. Since your information is already in the software you just need to add the extra bits needed for the FBAR. We’ll send them both off to the right agencies for you!”
Seeking professional help
You can do your own taxes as a US citizen abroad, but there are some tools that can assist you.
What are the benefits of using a software program over using an accountant?
“I started MyExpatTaxes because of the frustration I felt with the accountant I used to help me with my expat taxes. At the time, there was no software offering a do-it-yourself solution that specifically addressed expat issues, such as the FBAR being automatically included or even the ability to e-file.
“Most tax software requires expats to print their return and mail it to Austin, Texas, which can be time consuming, costly, and hard to track. At MyExpatTaxes we can e-file 99% of tax returns, the majority of which are accepted by the IRS in a matter of hours, not days or weeks.
“Also, if you want to work with an accountant and have the speed and convenience of expat tax software, we offer both. You can opt to have a tax professional review your return at the end or have a video call with one immediately before you start. MyExpatTaxes offers you every filing experience you could want: do-it-all-yourself, do-some-of-it-yourself, or get-it-done-for-you.”
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For the first time I had to file my US return as an expat. I was very fortunate to find someone who is not only capable of preparing the US return, but also the French return as well. The returns were both filed on-time and were well prepared. The cost was in line with what I had paid when I lived in the US. There are good tax preparers out there and the cost can be reasonable — if you do your “homework” and provide clear information.