We sometimes fantasize about moving to another country in search of a better life. It also feels great leaving your bills and problems behind to start a new life abroad in those moments. However, if all your bills are left behind, your U.S. tax bill will follow you across the globe. You’ll likely be filing taxes while living abroad and we’re here to give you some vital tips for doing just that.
Requirement for Filing Taxes While Living Abroad
United States citizens and foreign residents must file U.S. taxes while living abroad if they meet the minimum income qualifications. You most probably won’t need to file taxes while living abroad if you don’t need to while living in the United States.
The IRS point out that worldwide income is subject to U.S. income tax, in spite of where you reside.” The IRS classifies a U.S. citizen as being one of the following:
✔ A person born in the United States
✔ A person with a parent who’s a United States citizen (they note here that the two general ways to obtain citizenship through an American parent is at birth or after birth but before the person’s 18th)
✔ A former alien that has been naturalized as a U.S. citizen
✔ A person born in Puerto Rico, Guam, or the U.S. Virgin Islands
They also point out how to determine the tax status of a resident alien saying, “You are a resident alien of the United States for tax purposes if you pass either the green card test or the substantial presence test for the calendar year (January 1 – December 31.)” To pass the green card test, you must be a legal Permanent Resident of the United States during the calendar year. That is, unless you meet one of the following exceptions:
✔ You reject and abandon this status in writing to the USCIS,
✔ The USCIS administratively terminated your immigrant status, or
✔ A U.S. Federal court terminates your immigrant status.
Deadline for Filing Taxes While Living Abroad
The IRS doesn’t have the most sympathetic reputation. The requirements for filing taxes while living abroad are a good instance of this. While the deadline for filing your annual tax return in the States is April 15, taxpayers abroad get a little break.
“If you are a U.S. citizen or resident alien living overseas or are in the military on duty outside the U.S., on the regular due date of your return you are offered an automatic 2-month extension to file your return without requesting an extension,” the IRS says. This is called a “little” break because they continue, “Keep in mind that you must pay any tax due by April 15 or interest will be charged starting from April 15.”
You may decide to file your tax return as late as June 15, although you’ll be charged interest on what is owed. Feel free to benefit from the extension but do so cautiously. Based on how much you owe, interest can be an unexpected boost to your balance.
Foreign Credits Available for Filing Taxes While Living Abroad
Filing taxes while living abroad might seem to be an action you do not agree with, after all, you don’t use the things your taxes pay for. Income taxes cover things like defense, education, social security, national parks, and highways. These are all things you don’t benefit from when living or working abroad. This is because all Americans are duty-bound to maintain the operation of the country.
In fact, it costs almost $3.5 trillion dollars to run the country every year of which Income taxes only accounts for about 28 percent of those costs. The government uses loans from other countries and the purchase of new bonds to cover the rest. We must pay interest in both cases, making the cost to run the country even higher. The good news for citizens filing taxes while living abroad is that you have an option. You may claim a Foreign Earned Income Exclusion or a Foreign Tax Credit.
Taking the Foreign Earned Income Exclusion When Filing Taxes While Living Abroad
The Foreign Earned Income Exclusion (FEIE) cancels some taxable income from foreign sources on the U.S. tax return. However, any income earned over the exclusion amount will be taxed at the rate that would relate to the whole income amount. This is known as the stacking rule; it was developed to ensure citizens who live and working abroad pay the same rate as citizens living and working in the U.S.
American Citizens Abroad points out that, “The exclusion applies only to foreign earned income. Other income, like pensions, interest, dividend, capital gains, US-sourced income, etc., cannot be excluded with the FEIE. You are liable for the full US tax on this type of income.”
Taking the Foreign Tax Credit When Filing Taxes While Living Abroad
The Foreign Tax Credit is finds application if your earned income was taxed by a country other than the U.S. The Foreign Tax Credit quite often lets a taxpayer to reduce the amount taxed by a foreign country. Form 2555 needs to be completed for this credit. The IRS explains, “If you are eligible, you can use this form to figure your foreign earned income exclusion and your housing exclusion or deduction.”
It is important to note that you should take necessary precaution to avoid claiming a foreign tax credit for foreign taxes on the amount excluded on the form. The U.S. only offers a credit for foreign taxation on the income that they’re taxing, as well.
How to Pay When Filing Taxes While Living Abroad
Taxpayers living overseas fill out the same forms any American citizen or resident alien does, and just like people who live domestically, they have the duty of reporting their income in U.S. dollars even if they’re paid partly or in full in another currency.”
The IRS also says that taxpayers generally use the yearly average exchange rate to report foreign-earned income that was received on regular basis throughout the year. However, if you had foreign transactions on specific days, you may also use the exchange rates for those days.