U.S. Tax Filing in 2021 - A Guide for U.S. Expats

Contributed by Bright!Tax, 15 April, 2021

Americans living abroad are often surprised to learn that they have to continue filing U.S. taxes from overseas, reporting their global income.

While international tax treaties don't prevent U.S. expats from having to file both US taxes and foreign taxes in their country of residence, the good news is that when U.S. expats file from abroad they can claim certain IRS provisions to help them to avoid double taxation.

Filing U.S. taxes from overseas is different though, with different deadlines, additional reporting requirements and forms to file, and often currency conversions and the intersection with a foreign tax system to factor in, so it's always best to seek advice from a U.S. expat tax specialist.

Which U.S. expats have to file?

All Americans citizens whose income exceeds IRS minimum income thresholds in 2020 have to file a U.S. federal tax return.

These thresholds - which refer to global income - are USD 12,400 of any income, or just USD 400 of self-employment income, or just USD 5 of any income for Americans married to but filing separately from a non-U.S. taxpayer.

Americans living abroad may also have to file state taxes in the state where they last lived, depending on the rules in the particular state, which often look at whether the expat intends to return and what (if any) ties they've retained in the state.

What is the filing deadline for Americans filing from abroad?

Americans filing from abroad receive an automatic filing extension until June 15 every year. They still have to pay any U.S. tax that may be due by May 15 in 2021 though (normally April 15, but extended this year due to the pandemic), even if an estimated amount.

Expats can also request a filing extension to October 15 if they need one, the same as Americans in the states.

How can Americans filing from abroad avoid being double taxed?

Tax treaties don't prevent U.S. expats from filing U.S. taxes, but instead define how they can avoid double taxation. This is normally through claiming tax credits in lieu of taxes paid in another country.

The U.S. Foreign Tax Credit can be claimed by filing Form 1116 when expats file their U.S. return.

For expats who pay a higher rate of foreign income tax abroad, claiming the U.S. Foreign Tax Credit this way will eliminate their U.S. tax bill completely.

Alternatively, expats can file Form 2555 to claim the Foreign Earned Income Exclusion, which lets them exclude the first USD 107,600 (in 2020) of their earned income from U.S. taxation.

There are other U.S. credits and exclusions available for Americans filing from abroad too. An expat tax specialist will be able to advise based on each expat's situation.

What additional U.S. reporting requirements should U.S. expats be aware of?

As well as reporting their global income, Americans living abroad also often have to report their foreign bank accounts, investments, and business interests.

Americans who have over USD 10,000 in total in their foreign financial account balances, including bank, pension, and investment accounts, at any time during a year have to file a Foreign Bank Account Report (FBAR). Because FBARs are filed to FinCEN rather than the IRS, penalties for not doing so are steep, and the IRS is receiving the same information from foreign banks and investment firms directly.

Furthermore, Americans with over USD 200,000 of foreign investments at the end of the year, or over USD 300,000 at any time during the year, have to report them on Form 8938.

Lastly, expats must report any foreign registered businesses they may have. Foreign business reporting is complex, and it's best to seek advice on the U.S. tax and reporting implications, ideally before setting up a foreign business.

What should Americans who have been living abroad but not filing do?

Americans who have been living abroad for a number of years but not filing because they didn't know that they had to can catch up without penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so voluntarily before the IRS writes to them about it.

Tags: accounting | double tax agreement (DTA) | Tax | Tax Treaties | Expats | Treaties | expatriates | tax | individual income tax |



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