Do You Need to File a Federal Tax Return?
Yes, filing U.S. taxes from abroad is necessary if you would be required to file while living in the United States. This is true no matter where your income was earned; which currency it was distributed to you; or whether you have already paid taxes in the country where you currently reside. As of 2021, the income thresholds for filing foreign tax returns for U.S. expats are as follows:
- $12,550 for single filers and married couples filing separately
- $18,800 for heads of household
- $25,100 for married couples filing together
- Over $400 in earnings for self-employed individuals
The law requires that American citizens and resident aliens who live abroad must follow the same rules for filing income, estate and gift tax returns as those living in the United States. Regardless of where you currently reside, your worldwide income is subject to U.S. income tax. This means having experts help you with your federal tax return preparation is essential.
When Must You File Your Federal Tax Return?
If you are a U.S. citizen or resident and both your tax home and your abode are outside the United States and Puerto Rico on the regular due date of your tax return, you are automatically granted an extension (usually to June 15) to file your return and pay any tax due. You are not required to file a special form to receive the U.S. tax expat extension. However, you must attach a statement to your tax return when you file showing that you are eligible for this automatic extension.
Filing for an additional extension may be a good idea. You may benefit if, on the due date for filing, you have not yet met either the bona fide residence test or the physical presence test, but you expect to qualify after the automatic extension discussed above and you have no tax liability. We will provide all the information you need to file for an additional extension beyond the two-month period to June 15, including filling out Form 2350: Application for Extension of Time to File U.S. Individual Income Tax Return.
What Is the Foreign Earned Income Exclusion?
A limited amount of the foreign income tax you pay can be credited against your U.S. tax liability or deducted when calculating taxable income on your U.S. income tax return. Claiming a credit for foreign taxes rather than deducting them is usually to your advantage. A federal foreign tax credit reduces your U.S. tax liability, and any excess may be carried back or carried forward to other years. A deduction only reduces your taxable income and may be taken only in the current year. You must treat all foreign income taxes in the same way. You generally cannot deduct some foreign income taxes and take a credit for others.
If your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test, you can choose to exclude a limited amount of your foreign-earned income from your gross income. Your income must be for services performed in a foreign country during your period of foreign residence or presence, whichever applies. The amount of foreign income that can be excluded depends on whether you resided in a foreign country for the full calendar year or only part of the year.
If you claim the exclusion, you cannot claim any credits or deductions that are related to the excluded income. You cannot claim a foreign tax credit or deduction for any foreign income tax paid on the excluded income. Nor can you claim the earned income credit if you claim the exclusion.
What Is the Foreign Housing Exclusion?
If your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test, you may be able to claim an exclusion or a deduction from gross income for a housing amount paid to you. Housing amount is the excess, if any, of your allowable housing expenses for the tax year over a base amount.
Allowable housing expenses are the reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid or incurred during the tax year by you, or on your behalf, for your foreign housing and that of your spouse and dependents if they lived with you. You can include the rental value of housing provided by your employer in return for your services. You can also include the allowable housing expenses of a second foreign household for your spouse and dependents if they did not live with you because of dangerous, unhealthy or otherwise adverse living conditions at your tax home.
Are You Required to Make Estimated Tax Payments?
If you are working abroad for a foreign employer, you may have to pay estimated tax, since not all foreign employers withhold U.S. tax from your wages. Your estimated tax is the total of your estimated income tax and self-employment tax for the year minus your expected withholding for the year.
When you estimate your gross income, do not include the income that you expect to exclude. You may subtract from income your estimated housing deduction when calculating your estimated tax liability. However, if the actual exclusion or deduction is less than you expected, you may be subject to a penalty on the underpayment.
Form 1040 ES, Estimated Tax for Individuals, is used to estimate your tax. The requirements for filing and paying estimated tax are generally the same as those you would follow if you were living in the United States. If your tax year is the calendar year, the due date for filing your income tax return is usually April 15 of the following year.
How Does Withholding Tax Work from Abroad?
You may be able to have your employer discontinue withholding income tax from all or a part of your wages. You can do this if you expect to qualify for the income exclusions under either the bona fide residence test or the physical presence test.
U.S. payers of benefits from employer-deferred compensation plans (such as employer pension, annuity or profit-sharing plans), individual retirement plans and commercial annuities generally must withhold income tax from the payments or distributions. You can choose exemption from withholding under certain specific conditions.
What Is the Purpose of the Foreign Tax Credit Form?
If you choose to credit foreign taxes against your tax liability, you must complete Form 1116: Foreign Tax Credit (Individual, Estate, Trust or Nonresident Alien Individual) and attach it to your U.S. income tax return.
Your credit cannot be more than the part of your U.S. income tax liability allocable to your taxable income from sources outside the United States. So, if you have no U.S. income tax liability, or if all your foreign income is exempt from U.S. tax, you will not be able to claim a foreign tax credit.
What Is the Foreign Tax Deduction?
If you choose to deduct all foreign income taxes on your U.S. income tax return, you must itemize the deduction on Schedule A (Form 1040). You cannot deduct foreign taxes paid on income you exclude from your U.S. income tax return.
How Expat CPA Can Help
Filing your U.S. taxes from abroad can be a daunting task. As you have probably realized by now, there are many factors to consider and decisions to make. Our CPAs understand all the rules and regulations that apply to expat foreign tax returns, and we’re here not only to help you file, but also provide federal tax assistance that can help you in making the best decisions for your unique tax situation. When you trust us to handle your federal tax return preparation, you can rest assured we will take care of everything.
Get in touch with our experts today to learn more or use the Interactive Tax Assistant (ITA) tool provided by the IRS.
Our Federal Expat Tax Package
- Price: $299
- Includes Form 1040 (U.S. Individual Income Tax Return)
- Includes Form 2555 (Foreign Earned Income Exclusion and Housing Deduction)
- Includes assistance for filling out our tax questionnaire
Filing a Foreign Tax Credit Form
- Price: $150
- Includes Form 1116 (Foreign Tax Credit)