Key expat tax issues for U.S. citizens living abroad
You must file taxes in the U.S. and comply with reporting obligations
If you are a U.S. citizen or green card holder and you live overseas, you must still file taxes in the U.S.
You must also file a Foreign Bank Account Report if you have $10,000 or more in your foreign bank and financial account(s) at any time during the tax year. The following accounts are required to be disclosed:
- Bank, securities, financial instruments
- Mutual funds in which you hold an equity interest
- Life insurance or annuities with cash surrender values
- Foreign online gambling accounts
Penalties for non-disclosure are steep, depending on whether the violation is considered to be willful or non-willful. Further, under the FATCA (Foreign Account Tax Compliance Act) reporting, foreign banks are now obliged to report accounts with balances exceeding specific thresholds, and a failure to report could be readily ascertained by the IRS.
Streamlined Offshore Filing Procedures
If you have not complied with your U.S. tax filing and FBAR filing obligations, you may be able to do so without significant penalties under the Streamlined Offshore Filing Procedures. For more information, see streamlined procedures article.
Foreign Earned Income Exclusion
If you are a U.S. citizen or a resident alien or green card holders, you are taxed on your worldwide income for U.S. tax purposes. However, you may qualify to exclude up to $105,900 (for the 2019 tax year) of foreign earnings. To qualify, you must:
- live overseas for “an uninterrupted period that includes an entire tax year” (although you may leave that country for temporary visits to the U.S. or another country for the purposes of business or vacation;
- your income must taxed in the overseas country; and
- you must live in the overseas country for at least 330 qualifying full days (for 24 hours of each of those days and excluding your arrival and departure days) in a consecutive 12-month period, although this requirement is waived if you are required to leave that country due to “war, civil unrest of adverse conditions”.
Foreign Housing Exclusion
You can exclude or deduct certain foreign housing amounts, and the value of meals and lodging provided to you by your employer, to offset your living expenses while overseas. In order to do so, you must first qualify for the Foreign Earned Income Exclusion.
There is a base amount you can exclude, which is tied to the Foreign Earned Income Exclusion amount (currently $100,800) but there are higher exclusions for those who live in certain high-cost cities. The IRS publishes a list each year outlining the exclusions as they may change from year to year so you’ll want to take a look at that when you get ready to file.
The exclusion applies to reasonable expenses paid or incurred for housing in a foreign country for you, your spouse and your dependents, and do not include lavish or extravagant expenses, the costs of purchasing a property, furniture or accessories, and any improvements that enhance the value or the life of the property. The limit on housing expenses is generally 30% of the maximum foreign earned income exclusion, and may not exceed your total foreign earned income for the tax year.
File taxes in the foreign country and utilize your Foreign Tax Credits (FTCs)
If you pay taxes in a foreign country, you are entitled to offset you’re the amount of the taxes you paid in the foreign country against your U.S. tax liability. Therefore, you should ensure that you file (and pay) your taxes in the foreign country and avail yourself of the available FTCs.
Expatriation – renouncing U.S. citizenship
The renunciation of US citizenship by US citizens and the ending of U.S. residency status by long-term residents for tax purposes, is referred to as “expatriation”.
A US citizen will be treated as relinquishing their US citizenship on the earliest of four possible dates:
- the date they renounce their US nationality before a US consular officer, provided the renunciation is subsequently approved by the US Department of State issuing a certificate of loss of nationality;
- the date they furnish to the US Department of State a signed statement of voluntary relinquishment of US nationality confirming the performance of an act of expatriation, which is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the US Department of State;
- the date the US Department of State issues to the individual a certificate of loss of nationality; or
- the date a US court cancels a naturalized citizen’s certificate of naturalization.
The section 877A IRC expatriation rules for a “covered expatriate” apply if any of the following statements apply:
- your average annual net income tax for the 5 years preceding the date of expatriation exceeds an indexed amount ($168,000 for 2019);
- your net worth is $2 million or more on the date of expatriation; and
- you fail to certify on Form 8854 that you complied with all US federal tax obligations for the five years preceding the date of expatriation.
You are then treated as having sold your assets at fair market value and are taxed on the amount by which the fair market value of the assets (excluding an indexed threshold amount ($725,000 for 2019) and certain deferred compensation items) exceeds its adjusted basis.
A “covered expatriate” may elect to defer payment of the tax attributed to the assets deemed to have been sold.
The expatriation rules would not apply to you if you became a citizen of both the U.S. and another country at birth, and you continue to be a citizen of, and be taxed as a resident of, that other country.