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US Expat Tax Advice: What American Expats Need to Know

US Expat Tax can be a complex due to the fact that US expats are subject to US tax rules wherever they live in the world. This article provides an overview of the tax requirements of US expats around the world.

Written on 14 September 2023

US expats tax obligations are more complex and cumbersome than most other nationalities because the US is one of the only countries that require citizens living abroad to continue to file a US Federal Tax Return, regardless of where they live.

Failure to correctly file your taxes in the US will result in significant penalties. However, it might also be possible to legally exclude some income earned from tax and reduce your tax liability.

Ultimately, getting it right could save you thousands of dollars, and it is therefore worth getting professional advice to ensure you fully understand your tax obligations as a US expat.

This article is designed to look at the general tax requirements that US expats must be aware of and the rules that must be met to avoid significant penalties.

It is important to understand that this article is created as a guide only and must not be used in isolation to make any decisions about what tax is owed. You should always seek professional advice from a qualified tax adviser before making any decisions.

Overview Of US Expat Tax Requirements

US expat tax rules are much the same as for Americans living in America in that worldwide income is subject to US income tax.

One major difference is that for Americans living in the US, the deadline to file and pay your tax return is 15th April in any tax year, although US expats get an automatic two-month extension to file their taxes, meaning the deadline is automatically 15th June.

US taxpayers living abroad do not have to apply for this extension. However, any tax due must still be paid by the 15th April – failure to do so will attract interest on any late payment, beginning on the 15th April.

What If I Don’t Earn An Income?

Obviously, if you don’t earn an income anywhere in the world, you will not have to pay income specific tax anywhere in the world, including the United States.

However, a tax return might still need to be filed, depending on your circumstances. This potentially avoids complications if the IRS investigates any disputes over your tax status/liabilities.

US Double Tax Treaties

The United States has tax treaties with many other countries, which ensures you should be able to minimize the chance of double taxation on any particular income and will normally be delivered through foreign tax relief.

In simple terms, this means that the US Government may allow a tax credit to reduce your US tax liability if tax has already been paid in the country where you live – and ultimately, a vast number of US expats end up not having to pay any US tax.

However, if it is not carefully managed, it may still be possible to be taxed twice on the same income.

Correctly understanding and utilizing the double tax agreement between the US and your country of residence is difficult and should only be done with the support and guidance from a qualified tax adviser who can understand how to apply the rules to maximize any tax credits.

You also should not assume that because a tax treaty exists between the US and your country of residence that you do not have to file taxes in either country.

Can I Give Up My US Citizenship To Avoid US Tax?

It is possible to renounce your US Citizenship, however there are implications of doing so and your main motive for renouncing must not be to avoid paying US tax.

If you are considering renouncing your citizenship you will need specialist advice from a qualified tax adviser.

FBAR: Report Of Foreign Bank And Financial Accounts

Most US expats are likely to have a bank account in their country of residence, and potentially in other countries.

It is a legal requirement for all US expats to file a Report of Foreign Bank and Financial Accounts (FBAR) by 15th April which must be filed online.

FBAR covers ALL foreign accounts held by American expats including bank accounts, insurances, pensions, and trusts whether you are the main beneficiary or a signatory for the account – and the total balance held in the accounts is in excess of $10,000 at any given time in the tax year.

Failure to correctly file an FBAR report carries an automatic penalty of $10,000 per account – so it is vital to understand your full responsibilities on what the status is and what is owed.

It is possible to file your own FBAR however, if you are unsure of your requirements or what you need to do, it is highly advisable that you seek professional assistance from a tax adviser who can walk you through the process.

The Foreign Earned Income Exclusion

The largest and potentially most important tax opportunity available to American expats is the Foreign Earned Income Exclusion (FEIE).

Foreign Earned Income Exclusion is different from Foreign Tax Credits, for a comparison of both schemes, please read our article Foreign Tax Credits vs Foreign Earned Income Exclusion >

From the 2023 tax year, the FEIE potentially enables American expats to avoid paying tax on the first $120,000 of foreign earnings (increased from $112,000 in 2022) providing a number of criteria are met. If you are married, then you both qualify for the maximum exclusion up to $240,000.

Firstly, income must be foreign earned, which means earnings must not:

  • Be received from the US military or as a result of employment by the US Government
  • Be earned while in international waters – this is not deemed as a foreign country
  • Be earned while working in specific combat zones as declared by the US president
  • Be paid in the following tax year that the work was actually conducted
  • Be earned from pensions or annuities – or other social security benefits

To determine whether you can claim an exemption under FEIE, you must meet particular criteria, which means:

  • You must have earned foreign income (other than from the exclusions above)
  • You must live in a foreign country
  • You must be a be a US citizen OR be a US resident alien that has a citizenship with a country that has a taxation agreement with the US (for example, the UK)
  • You must have been a tax resident in a particular country, uninterrupted, for an entire tax year. In the case of the UK, this means that you must satisfy the requirements of the Statutory Residence Test to be deemed a UK tax resident.
  • You were physically present in a foreign country for at least 330 days during a period of 365 days.

If you are eligible to claim an exclusion under FEIE rules, you will need to file Form 2555 or Form 2555-EZ (a shorter form). Which form you need to complete will depend on meeting a certain number of criteria.

In all cases, it is highly advisable to seek professional advice about FEIE and whether you are potentially eligible for an exclusion – and potentially even assistance completing the form.

Speak To A Trusted US Expat Tax Specialist

We work with trusted US expat tax specialists who have extensive experience and understanding of the US tax system for US expats living around the world. The introduction will connect you to someone who will be able to offer professional services to assist any US expat needing to:

  • Identify their US compliance and filing requirements
  • Prepare and complete US Federal and State tax returns
  • Manage the timing of US tax payments and other foreign tax credit planning
  • Plan any cross-border pension schemes

Request free introduction to a US expat tax specialist >

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