Whether you’re freelancing from Florence, trading in Tokyo, or busking in Bali, the IRS wishes you well! They would also like to remind you that for tax purposes they see little difference between US citizens and resident aliens living abroad compared to those living in the US.
If this is news to you or if you’re not on top of all the details, don’t worry. In this article we cover what you need to know as a US citizen living abroad or a resident alien with respect to taxes. We’ll also look at how Wise can help you if you need to pay your taxes or receive your tax refund.
|This article will look at:|
|This article has been written in collaboration with Brittany Lally, a Managing CPA at Bright!Tax US Expat Tax Services.|
If you’re a US citizen living abroad, you’re still subject to US taxes. The US taxes your foreign income from all sources no matter where you live. And the only way to avoid US taxes is to renounce your citizenship, even if you're a dual citizen.
But just because you’re subject to taxes, it doesn't mean you actually have to file a return. It all depends on your income, filing status, and age. And after you file a return, you may end up with a refund or be saved by exemptions and tax credits - see sections below:¹
- If you’re single and under 65 years old, you only need to file if your income exceeds $12,500
- If you're under 65 and married and filing jointly if your income exceeds $25,100
- If you’re under 65 and married and filing separately: $5
- And if you’re under 65 and head of household if your income exceeds $18,800.
|The exceptions are if you have any self-employment income, or if you’re married to a foreigner who isn’t a US taxpayer, in which case you have to file whatever your income level.|
US resident aliens are also subject to US taxes. Filing requirements are the same as for US citizens - check your filing status, age, and income against the requirements.
A US resident alien is a non-US citizen who meets either of the following tests²:
- Green Card Test: Anyone who was a lawful permanent resident of the US at any time during the calendar year
- Substantial presence test: Your were in the US for 31 days during the current calendar year and were in the US for a total of 183 days during the current and preceding two years - but only count ⅓ of the days in the first preceding year and only ⅙ of the days in the second preceding year.
|Green Card holders can abandon their Green Card to avoid having to pay US taxes, but they would still need to ensure that they don't meet the “Substantial presence test” mentioned above.|
While living abroad, it is important to take advantage of any tax exclusions and credits that can reduce your US tax liability. You might be wondering how much foreign income is tax free in the USA - and the IRS does provide for citizens living abroad various tax mechanisms to offset potential double taxation (paying taxes both in the country you reside and in the US).
If you claim the Foreign Earned Income Exclusion by filing IRS Form 2555, then you don't have to pay tax on your first $108,700 of foreign income in 2021. This exclusion can only be taken on earned income. That is, you performed a service and received a salary or commission in return. The $108,700 threshold is adjusted for inflation each year.³
Foreign income earned indirectly cannot be excluded using the FEIE. This includes income such as dividends, interest, capital gains, gambling, business profits, rents, and scholarships.
You can also deduct or exclude certain rental housing expenses from your gross income while living abroad by claiming the Foreign Housing Exclusion. Similar to the FEIE, this exclusion is also on Form 2555.³ If you’re self-employed and paying for your foreign housing, you can claim the Foreign Housing Deduction.³
To qualify for these exclusions, you must satisfy one of the following requirements:³
- You’re a US citizen or resident alien who resides in a foreign country for a full tax year.
- You’re a US citizen or resident alien who is physically present in a foreign country or countries for at least 330 full days during a 12 month period.
If you had to pay or have accrued foreign income taxes in your country of residence, you can claim the Foreign Tax Credit on IRS Form 1116.⁴ To qualify for the Foreign Tax Credit, the tax needs to be imposed on you, you must have actually paid it or accrued it, and it must be a form of income tax. You will only get a credit on the final liability - less any refunds provided by the foreign government on the tax.⁵
Foreign taxes also include taxes paid to US possessions like Puerto Rico and the US Virgin Islands.
Note that you can’t apply the Foreign Earned Income Exclusion and the Foreign Tax Credit to the same income. (Your expat tax advisor will advise you which one it’s most beneficial for you to claim).
As a citizen or resident alien of the US, you may also be eligible for certain tax benefits, and rate reductions arising from the income tax treaties the US has with several countries - see a full list of treaty countries here.
The US has income tax treaties with many countries around the world. Each treaty is unique, but all treaties serve the same purpose: to eliminate double taxation.
Treaties often cover topics such as how retirement income will be taxed and which country capital gains will be taxed in. The form used to claim a tax treaty provision is Form 8833 and it must be submitted alongside your tax return.
Need to pay your US taxes as an expat? Expecting a refund from the IRS, but you live abroad? Meet Wise.
Paying for your US taxes or receiving a tax refund can be tricky - the payment options are often slow and costly, and this doesn’t get better when you’re not in the country and/or manage different currencies.
|Whether you’re a US expat, a resident alien, or you have a foreign business, Wise is for you: with a Wise account, you can either pay your taxes from abroad or receive your tax refund easily. And if you manage more than one currency, you’ll save a lot on exchange rate mark-ups and conversion fees.|
When you fill out your tax forms, use your Wise USD Account and routing numbers. You can find them under ‘Account Details’. This will let you:
- Use direct debit to pay your taxes straight from your Wise account, avoiding the fees from other payment methods
- Set up a direct deposit, the fastest way to receive your tax refund, to your Wise USD account details
Wise has no subscription fees or minimum balance requirements, and you can set up an account in minutes. You can send, receive, hold and spend your money in multiple currencies, always with the real exchange rate, and just with a small and transparent fee.
Filing a tax return is often just the start for US expats. In many cases you also need to provide further specific filings; some of the most common filings are discussed below.
If you own one or more foreign financial accounts and the total, combined value of those account balances exceeds $10,000 at any point during the reporting year, then you need to file an FBAR (Report of Foreign Bank and Financial Accounts).⁶ Financial accounts include savings accounts, checking accounts, term deposits, brokerage accounts, mutual funds, and insurance policies with a cash value.⁶
The FBAR has been around since the 1970s, but enforcement has become stricter in recent years. It was introduced to crack down on money laundering, tax evasion, and other criminal activities.
The FBAR is submitted separately from your tax return to the Financial Crimes Enforcement Network (FinCEN), not the IRS.⁶ It is submitted electronically using FinCEN’s BSA E-Filing System. The official due date is April 15th; however there is an automatic extension until October 15th.
The penalty for not filing the FBAR is severe and can result in penalties ranging from$10,000 to over $100,000.⁶
If you need to file a US tax return, you may also need to report on your foreign financial assets if the aggregate value of those assets exceeds the prescribed threshold.
For a single person living abroad, the threshold is $200,000 at the end of the year or $300,000 at any point during the year. If you file jointly with your spouse it is $400,000 at the end of the year or $600,000 at any point during the year.⁷
Filing for FATCA is done on Form 8938.⁸ The IRS also requires foreign financial institutions to report directly their US taxpayers’ foreign financial accounts.
Foreign financial assets include bank accounts, foreign stock and securities, foreign financial instruments, contracts with non-US persons, and interests in foreign entities.⁷
You don’t need to report any foreign real estate you own under FACTA unless the real estate is held through a foreign corporation, partnership, trust or other entity.⁹
If you sell any real estate during a reporting period then you’ll need to include that when assessing your taxable income for your tax return.
Every US State has different tax regimes, but generally you only need to pay State taxes if you had ties in the State during the reporting year.
Having ties (or domicile) to a state may include any of the following:
- If you lived in the State for part of the year
- If you maintain a home in the State
- If you still have financial accounts in the State
- If you maintain a state driver’s license
- If you maintain your voter registration in the State
If you last lived in a State with no income tax like sunny Florida and pristine Alaska, filing state taxes is not required, but be sure to check that there are no taxes on other sources of income.
Some States require a bit more work as their tax regimes can get more complicated - we’re looking at you California, South Carolina, New Mexico, and Virginia.
In the eyes of the IRS, there are two particular types of foreign companies owned by US citizens that can trigger complex reporting. These are Passive Foreign Investment Companies (PFIC) and Controlled Foreign Corporations (CFCs). Both are subject to US taxation but require filing different forms. Let’s look at both types of companies below.¹⁰
A passive foreign investment company is a foreign company that generates 75 percent of its gross income from passive investments (this is called the ‘Income Test’) or 50 percent of its assets, on average, are from passive sources (this is called the ‘Asset Test’).¹¹ Passive income is income that the company did not provide direct services for, such as from dividends.¹¹
If you’re a shareholder of a passive foreigninvestment company (PFIC) and you receive distributions from the PFIC, recognize a gain on the stock, or if it is marked to market, then you must file Form 8621.¹²
Generally, if you’re a shareholder or an officer or director in a foreign corporation which is 50 percent or more owned or controlled by US shareholders (or owned by one or more US corporations) then you may need to file Form 5471.¹³ ¹⁴ The rules for CFCs are quite specific and it is best to seek advice from a tax advisor.
Foreign registered single-owner LLCs are not automatically considered disregarded entities that can be reported on Form 1040 like US registered LLCs. If you operate a foreign branch or own a foreign company, you should consider using Form 8832 to have the company treated as a disregarded entity and then use Form 8858¹⁵ when reporting on your company to the IRS. The forms are also filed alongside your individual tax return.¹⁶
Americans living abroad still have to pay any tax they owe by April 15 (April 18 in 2022), however most expats won’t owe any US tax once they file. The filing deadline for expats is actually 2 months later, June 15, to give you time to file your foreign taxes first. If you still need more time to file, you can request a further extension to October 15 (October 17 in 2022). FBAR filing meanwhile is due by October 15.¹⁷
The good news is that if you miss all the deadlines or if you’re due a refund there are no failure to pay penalties.¹⁸ The late filing penalty after 60 days is $435.
But if you owe tax and are late then you will have to pay penalties and interest. Generally, the late-filing penalty starts at 5 percent of the tax you owe for each month the tax return is late - up to a maximum of 25 percent.¹⁹
Failure to submit some specific forms can also result in penalties, for example, failure to file FBARs can result in significant penalties.⁶
If you’re a US citizen living abroad and haven’t filed a tax return for years, you may qualify for an IRS amnesty program called the Streamlined Procedure that lets you catch up penalty free.²⁰
This program is available for both US individual taxpayers residing outside and inside the country. And in order to benefit from it, the IRS states that taxpayers need to certify that their "failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part".²¹
- IRS - Publication 54 (2021), Tax Guide for US Citizens and Resident Aliens Abroad
- IRS - Publication 54 (2021), Tax Guide for US Citizens and Resident Aliens Abroad
- IRS - Foreign Earned Income Exclusion
- IRS - Foreign Tax Credit
- IRS - Foreign Taxes that Qualify for the Foreign Tax Credit
- IRS - Report of Foreign Bank and Financial Accounts (FBAR)
- IRS - Summary of FATCA Reporting for US Taxpayers
- IRS - Statement of Specified Foreign Financial Assets
- IRS - Basic Questions and Answers on Form 8938
- IRS - Instructions for Form 8621 (01/2022)
- IRS - About Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- IRS - Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- IRS- Information Return of US Persons With Respect to Certain Foreign Corporations
- IRS - Instructions for Form 5471 (01/2021)
- IRS - Instructions for Form 8858 (09/2021)
- IRS - Information Return of US Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)
- IRS - US Citizens and Resident Aliens Abroad
- IRS - Sample Article for Tax providers - If you missed the tax deadline, these tips can help
- IRS - Eight Facts on Late Filing and Late Payment Penalties
- IRS - Streamlined Procecudures for Americans Abroad
- IRS - Streamlined Filing Compliance Procedures
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates, and it is not intended as a substitute for obtaining tax advice from a Certified Public Accountant (CPA). Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
All you need to know about the US Foreign Tax Credit as an American expat.
Can you get an international student loan as a foreign student in the US? Find all you need to know — and the best options for you — in this handy guide.
Be it for temporary reasons or a more permanent pursuit of the “American Dream,” moving to the United States of America always entails a few adjustments —...
Moving to Europe is no doubt a ‘bucket list’ item for many people around the world. The history, diverse cultures and languages, and excellent quality of life...
Want to save money when you send Brazilian reais? There’s a smarter, cheaper way to send money internationally. When you convert currencies with traditional...
Want to save money when you send Canadian dollars? There’s a smarter, cheaper way to send money internationally. When you convert currencies with traditional...