If you’re an American expat working abroad, you’re living a dream that many envy and few can have. But here’s something you may not know: no matter where you work as a US citizen, you must still file US income taxes.
This is not something to take lightly. Ever since the Foreign Account Tax Compliance Act (FATCA) passed in 2010, the IRS has more power to monitor — and potentially audit — your overseas accounts. More importantly, tax year 2016 marks the first time the IRS may cancel your passport if your tax delinquency reaches $50,000 (adjusted for inflation).
The good news is that while you’re required to file a US tax return, you may not have to pay taxes if your annual foreign income is below a certain level. Even better, you may have a chance to claim refundable tax credits to grow your bank account.
To demystify the process and help you start, here are some tips you should know as an American expat before you file for 2016.
Tip 1: Always file, and do it before the deadline
It doesn’t matter where you’re working, if you’re a US citizen or a resident alien, the IRS says you need to file by April 18th for tax year 2016. So gather all documents that show you how much in earnings, interest, and investment income you made overseas for the year, and set aside some time for taxes.
If you don’t owe US taxes on your foreign income (more on that next), the IRS extends the deadline automatically by two months — giving you until June 15th to file. You can also apply for additional extensions through October 15, though you may owe interest on your unpaid taxes.
Tip 2: Minimize your taxable income with the Foreign Earned Income Exclusion
Great news! You may not even have to pay US taxes on your foreign earnings if you qualify for the Foreign Earned Income Exclusion (FEIE).
Here’s how it works. If you lived outside the US for at least 330 days for 12 consecutive months during 2016, you may be able to claim the FEIE to exclude up to $101,300 (or $202,600 for married joint filers) of your foreign income from US taxation. In other words, if you earned less than six figures last year, you may not even owe US income taxes for 2016. (More help: You can use our currency conversion calculator to translate your foreign income into US dollar amounts).
Even if your foreign income exceeded that amount in 2016, the still-good news is that you only need to pay US income tax on the difference between your foreign income and the FEIE threshold.
Tip 3: Reduce “double taxation” using the Foreign Tax Credit
If you’ve been living abroad for some time – six months or longer usually — you may need to pay income taxes in the country where you’re working in addition to US income taxes. Fortunately the IRS lets expats limit some of this “double taxation” with the Foreign Tax Credit.
Under the credit’s rules, if the foreign income tax rates are higher than your US tax rates, you only have to pay the foreign country’s income taxes on the amount you made beyond the FEIE threshold. Otherwise, you pay the US tax rate minus the lower-tax country rate.
Tip 4: Watch your foreign account balances and currency gains
Listen up if you have much of your wealth sitting in overseas accounts! Under FATCA, American expats are required to report their foreign financial assets if their account balances exceed a cumulative total of $200,000 (or $400,000 for married joint filers).
US expats with overseas investments also need to watch out for foreign currency gains, which are taxed when you sell investments. For example, let’s say you bought shares of a UK stock in 2016 and sold your shares later in the year. Even if the stock didn’t gain in value, you may have made an overall (taxable) profit if the British Pound appreciated enough while you held the stock.
Tip 5: Look for refundable tax credits to pad your bank account
As an American expat, you may receive the same “refundable” tax credits that all US citizens have access to – allowing you to potentially reduce your tax liability to zero or even get a cash refund. If you’re a parent, for example, the Additional Child Tax Credit can give you up to $1,000 per child if you didn’t exclude your entire salary using the FEIE.
Other common refundable tax credits for expats include the Earned Income Credit for low-income expats and the American Opportunity Credit for non-dependent students attending undergraduate school abroad.
While you may not be able to flee the US tax season as an American expat, we hope these tips will help you save money. Be sure to consult your preferred tax professional to ensure you meet all of your tax obligations this season.
One more thing. Whether you owe the IRS taxes on your foreign earnings or you’re expecting to pocket a refund, you’ll need a way to transfer your money between your overseas accounts and your US bank account. See how we can help you save time and money on international transfers by clicking here.