With the advance of the internet, some US citizens have discovered that they can earn income without ties to a particular location. As US citizens move overseas, they face more complicated tax issues. US citizens living abroad still have to file US tax returns, report foreign assets, pay estimated taxes, etc. In general US citizens living abroad still have the same tax obligation as the counterparts in the US. On the bright side, they are entitled to special tax breaks available to only US citizens living abroad.
Required filings
US citizens living abroad are required to file the following:
US Tax return
As a US citizen living abroad, you are still required to report on all your income earned regardless of location.
FinCen Form 114
This form reports foreign banks and financial accounts (FBAR). You are required to report your financial interests in any foreign bank accounts or securities you control. You do not need to file this form if you this is a US military bank or the financial assets are less than $10,000. You can file this form electronically through the Financial Crimes Enforcement Network (FinCen).
FinCen Form 105
If you transfer funds over $10,000 out of the US, you need to report the transfer using FinCen Form 105.
Form 8938
Form 8938 is the Statement of Specified foreign Financial Assets. Use this form to report certain financial assets outside the United States.
Tax Breaks
Foreign Earned Income Exclusion (FEIE)
As a US citizen living abroad you may be eligible to exclude up to $99,200 if you meet the following requirements:
- You maintained a tax home in a foreign country
- You earned income during your stay
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You either
- Were a bona fide resident of a foreign country for the entire tax year
- Resided in a country with a tax treaty and were a bona fide resident during the tax year
- You were present in a country for at least 330 days within 12 consecutive months.
These minimum requirements are waved if you left because of war or civil unrest.
Income that qualifies for exclusion
If you meet the requirements discussed above, you can exclude earned income up to $99,200 from your individual tax return. Earned income includes salaries and wages, commissions, bonuses, self-employment income (subject to self-employment taxes).
If you run your business as an s corporation, the amount that flows through to your personal taxes are not earned income. To exclude your income as an s corporation, you must pay out the income as wages.
Foreign Housing Exclusion
In addition to the foreign earned income exclusion, you can claim a deduction for your housing. The exclusion applies to housing paid with self-employment earnings.
Foreign tax credit
The foreign tax credit eases the double tax burden US tax payers living abroad face. As a US citizen living abroad, you are most likely required to pay taxes in your country of residence. The foreign income tax credit can be used to alleviate the burden of paying double taxes to both your country of residence and the United States. You can choose to use the foreign tax credit or foreign earned income exclusion to reduce your tax burden.
Tax breaks were not created so taxpayers can evade taxes. These tax laws were created to alleviate the burden of double taxation and not to evade taxes. So be consistent in applying the law to both your country of residence and the United States.
Summary
As a US citizen living abroad, it is important you are aware of your obligations to the United States. Not paying attention to your tax requirements could cost you hefty fines and penalties. If you move to a foreign country as a means to evade taxes, then you are committing a crime and could serve time.