Please note the information below is intended to provide generalized information that is appropriate in certain situations.  It is not intended or written to be used, and it cannot be used by the receipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer.  The contents of the information provided below should not be acted upon without specific professional guidance.  Please call us if you have any questions. 

If you are a US Citizen or a green card holder and living abroad your worldwide income is subject to US income tax. 

What do you need to file? 

Just as you did when living in the US, you need to fill out Form 1040.  The forms that will be specifically applicable to you will be Form 2555 and Form 1116.  These are the forms by which you declare your foreign earned income and qualify for Foreign Tax Credit.  If you have a foreign bank account you would also need to complete informational forms TDF 90-221 (FBAR) and new in 2011, form 8938. 

When is my tax return due?

For Americans living within the US, the tax return is always due on April 15th or the following Monday (if the 15th is a weekend or a holiday). A two month extension is automatically given to citizens living abroad putting the expat due date (for filing purposes) at June 15th. The two month extension is automatic, but an additional extension can be filed for if needed. The filed-for extension moves the due date (for filing purposes) as far back as October 15th. Neither of these extensions apply to paying taxes. Any taxes owed, regardless of whether you are stateside or abroad, are due on April 15th.

What is Foreign earned income exclusion? 

One tax break for expatriates is the Foreign Earned Income Exclusion. If an American moves abroad, he or she can exclude foreign-earned income up to $95,100 as of 2012 from U.S. taxation. To qualify, that person must have lived outside the United States for 330 days in 12 consecutive months. 

That means an expatriate making $85,000 overseas would pay no taxes, although he or she still must file IRS Form 1040 and claim the exclusion. If the expatriate makes $120,000, tax must be paid on the difference between his or her salary and $92,900, or $27,100. But if the expatriate visits the United States for more than 35 days in that period, the benefit is lost.

What is Foreign tax credit? 

Once you’ve been overseas for an extended time, usually at least half a year, you become subject to taxes in your country of residence.  If you’re also paying taxes in the United States, that would be double taxation. So the U.S. tax code allows you to take a foreign tax credit. Under this section of the tax code, you subtract the lower of the tax rates from the higher. In effect, you pay only the higher of the two tax rates, split between the two countries.

For example:   Say you lived and worked in London in 2012 and made $180,000 a year. You can use the Foreign Earned Income Exclusion to exclude $95,100 of that income from taxes. The remainder, $84,900 is subject to U.S. and U.K. tax. Your income tax rate in the United Kingdom could be 20 percent and your American rate 30 percent. You pay the British tax, and subtract that rate from the American tax, so you pay just 10 percent of the $87,100 in American taxes.

Who needs to file an FBAR? 

If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the IRS by filing a FBAR. 

United States persons are required to file an FBAR if: 

1.The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and

2.The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. 

United States person means U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States. 

If you need assistance filing your expatriate tax return please do not hesitate to contact us.