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Do You Still Have To Pay US Taxes When Living Abroad?
Because of the Foreign Earned Income Exclusion and the US Foreign Tax Credit, most expats in the United States do not pay US expat taxes. If an expat’s gross worldwide income exceeds the filing level, he or she must still submit taxes annually. Even if you owe no taxes to the IRS, you may be required to file.
Citizens of the United States are taxed on their worldwide earnings.
No matter where they live or work, American citizens living overseas are nonetheless subject to US taxation on their worldwide income, according to the IRS. As a result, expats must combine their US and international income to determine if they must file.
Investment or rental income are common sources of income for expats in the United States. If you receive Form 1099 while travelling abroad, it means the IRS has a record of your earnings. Expats’ foreign income often consists of their expat wage, or money obtained as a foreign employee.
The standard deduction of each tax filing status is frequently used to determine the income filing threshold. Those with non-US spouses, on the other hand, are usually regarded filing separately and have an exceptionally low filing barrier of only $5.
Foreign Income is Taxed In The United States
Although the United States may be one of only two countries that impose citizen-based taxation, other countries already do so.
The tax laws in the United States are virtually the same for citizens residing abroad as they are for citizens living in the United States. Expats can use the same Form 1040 and pay the same federal income tax rates as Americans.
In addition, the IRS offers a few methods for avoiding double taxation for expats. Expats have the option of:
1) avoiding US taxation on their foreign earned income;
2) Take a tax credit for overseas income tax paid against US taxes payable.
3) Using a legitimate tax treaty, exempt additional types of income from US taxation.
There is one snag with foreign investment income: it may be categorized as PFIC investments. These will not be eligible for the preferential US capital gains tax rate of 20%.
When Should You Submit FEIE U.S. Tax Form 2555?
First and foremost, what is the FEIE (Foreign Earned Income Exclusion)?
FEIE is an expat tax benefit that allows qualifying expats to deduct up to $107,600 from their taxable income in the United States in 2021.
We usually advise expats to take advantage of the Foreign Earned Income Exclusion if they:
1) In their host nations, they pay little or no income tax.
2) having income from the United States that is less than the standard deduction
3) They do not have or plan to have children who will register for Social Security Numbers in the United States.
FEIE, albeit the most popular expat tax benefit, might be restrictive if you want to:
1) Put money into your retirement accounts in the United States (i.e. IRA)
2) Claim any refundable tax credits you may be entitled to (i.e., Additional Child Tax Credit).
Another disadvantage of using Form 2555 as soon as you go overseas is that once you start, you can’t cease excluding your foreign earned income with FEIE without facing penalties. Once you opt to cease utilizing FEIE in exchange for another expat tax benefit, the IRS will normally not allow you to utilize Form 2555 again for five years.
If you dwell in a jurisdiction with a high-income tax rate, such as the European Union, there’s no reason to use Form 2555 when the Foreign Tax Credit technique is available.
The FEIE and Foreign Housing Exclusion are the sole options for persons who pay little or no foreign income tax, such as employees in international organizations. The Foreign Housing Exclusion allows expats to deduct some of their living expenses when living in another country.
Only Americans residing overseas can use FEIE if they can show that they:
1) They have a residence in a foreign country for tax reasons.
2) Spend at least 330 full tax days in a foreign nation or countries within a 12-month period beginning or ending in the tax year.
When Should Form 1116 – Foreign Tax Credit Be Filed?
The Foreign Tax Credit, which can be claimed by filling out Form 1116, is another typical tax credit for US expats. This benefit is used to avoid double taxes for US expats. You can apply each euro, pound, or dollar you pay in income taxes to another country as a credit against your US tax liability.
For example, US citizens who pay UK tax can use Form 1116 to claim their UK income taxes. The portion of taxes allocated to overseas income might be offset by any foreign income tax paid under US tax laws for expats.
Expats from the United States should fill out Form 1116 if they:
1) pay a higher income tax rate in their host nation – they would then be taxed at the US Expat Tax Rate (same as the tax rates for Americans back home)
2) having “unearned” income from investments and other sources that cannot be excluded using Form 2555.
3) Make more money abroad than the foreign maximum exclusion ($107,600 in 2021).
In addition to Form 2555, Form 1116 can be used to account for income tax on payments not excluded by the FEIE. Income tax directly assigned to any excluded income, on the other hand, must also be excluded.
Despite the fact that Form 1116 is a complex form to fill out, we recommend that expats utilize it if they have enough foreign income tax credits to decrease their US taxes to zero!
When Should Form 8833 - Tax Treaty Benefit Be Filed?
Every American living abroad should be aware of the tax treaty that exists between the United States and the country in which they reside. The majority of tax treaties specify which country has tax rights on various sorts of income, such as:
1) Benefits from Social Security
2) Retirement Income
3) Royalty payments
International tax treaties can even specify how US citizens living overseas are taxed on their capital gains. Expats will provide the IRS of the following information on Form 8833, Treaty-Based Return Position Disclosure:
- What tax treaty is being used?
- The tax treaty’s specific provision
- Describe the treaty-based return situation, such as exempt income.
Expat Filing Errors in The United States
The most common filing errors made by US expats are when they do not:
1) When completing your expat tax return, include Form 2555 or Form 1116.
2) Take advantage of the increased child tax credit.
3) After June 15th, file a request for an extension.
4) Submit your FBAR together with your tax return.
Even when using expert US expat tax services, some of these errors can occur. Because of its popularity and convenience of use, most tax firms will use Form 2555 instead of Form 1116. Even if families living overseas are eligible for a refund of up to $3,600 per qualifying child under the Additional Child Tax Credit.
Another mistake that Americans living overseas and accidental Americans can commit is not reporting their US taxes. This, like the ones mentioned above, is a fixable error. Those who have not filed their US taxes can take advantage of the Streamlined Filing Compliance Procedure, which is a US expat tax amnesty scheme.
Expats Paying US Taxes: US Expat Tax Return
A US citizen living in another country would only be required to pay US taxes if they:
1) having income from the United States that exceeds the standard deduction and is consequently subject to US income tax
2) fail to pay adequate foreign income tax on unearned foreign income that is nonetheless taxed in the United States (i.e., capital gains on foreign property sold).
How to File, Pay, and Request IRS Assistance
Americans living overseas are advised to file their taxes electronically, either using our US expat taxes software or through a US expat tax firm that offers this service. Otherwise, the address to send a US tax return (without a cheque) from outside the US is:
The Treasury Department
Internal Revenue Service (IRS)
73301-0215 Austin, TX, USA
How To Pay US Taxes Abroad: The IRS Payment Page Allows You To Pay Your Taxes Online
When the IRS receives your US expat tax return, they are not required to notify you. Only if they have questions will they receive messages in the mail. You can utilize their “Where’s my refund” page to monitor the progress of your US expat tax return. If you are not expecting a refund, the only way to ensure that your mailed US expat tax return was received is to call them directly.
The phone number for IRS expat tax support is +1 267-941-1000. We recommend utilizing an online phone app because this number is not toll-free.