Americans living abroad are subject to the same U.S. income tax filing requirements as those living in the United States. However their tax situation is considerably more complex. In addition to complying with the tax laws of the country in which they are resident they have a U.S. tax obligation. They must file a U.S. Income Tax Return and report their world-wide income from all sources, in any currency, unless it is below the minimum filing requirement. It does not matter where earned, paid or received. They are required to file a Form 1040 every year even if their foreign earned income is below the excludable amount of $91,400 (for 2009). The earned income exclusion is not automatic. It is an election and it can only be elected by filing a U.S. tax return with an attached Form 2555 (Foreign Earned Income).
While most American expats are required to file a U.S. tax return, their U.S. tax may be reduced or eliminated by:
* a foreign earned income exclusion (Form 2555)
* a housing expense exclusion or deduction (Form 2555)
* a credit for foreign income taxes paid (Form 1116)
Expats working abroad may qualify to exclude foreign income earned. The maximum foreign earned income exclusion of $91,400 is available to expats who have lived in a foreign country for a full calendar year (residence qualification) or who have lived abroad for 330 days during a consecutive 365 day period (physical presence qualification). Foreign earned income is income earned for work or services performed in a foreign country during your period of foreign residence or presence.
If both husband and wife have foreign earned income, each is entitled to his/her own $91,400 earned income exclusion.
Americans resident abroad are allowed an exclusion or deduction for a housing amount. The housing amount is the excess of reasonable allowable foreign housing expenses for you and your family over a base housing amount subject to a per city and country limitation. Allowable housing expenses include rent, repairs, utilities (not including telephone charges), real and personal property insurance, non-refundable lease fees, occupancy taxes and residential parking. You can also include the allowable housing expenses of a second foreign home if your family did not live with you at your place of employment because of dangerous or other adverse living conditions.
Income taxes paid to a foreign country may be credited against your U.S. tax on your foreign income or claimed as a deduction. In almost all cases a credit is more advantageous than a deduction. A credit directly reduces your tax liability whereas a deduction only reduces your taxable income upon which your tax is computed. A foreign tax credit is subject to limitations. Any excess foreign tax not utilized as a credit in the current year because of limitations may be available as a carryback to the first preceding year and then any excess not utilized in that year is available as a carryforward to the next 10 years. However, any foreign tax attributable to excluded foreign earned income cannot be claimed as a tax credit or as a tax deduction on your U.S. Tax Return.
A surprise to many taxpayers has been the Alternative Minimum Tax (AMT). When originally enacted this tax was intended to apply to a small number of "rich" taxpayers who were paying little or no tax as result of tax "breaks" they were receiving. The AMT was intended to be a minimum additional tax for these taxpayers. Recent reductions in regular income tax rates, without a corresponding reduction in the AMT rates, and the fact that AMT was never indexed for inflation has caused many more people to be subject to this tax for the first time. Fortunately many expats can offset all or part of this tax with a foreign tax credit.
U.S. citizens resident abroad on April 15 are granted an automatic extension of time to file to June 15. However interest accrues on any tax paid after April 15. An additional extension to file (but not to pay tax) to October 15 may be obtained by filing Form 4868 before the extended due date of June 15. In addition to interest, late payment penalties may apply if you have not paid at least 90% of your tax by June 15 including any payment made with Form 4868.
If you are living abroad and your spouse is not a U.S. citizen you may elect to treat your spouse as a U.S. resident for tax purposes. The major reason for making this election is so that you can then file a joint tax return with the resulting lower tax rates, higher standard deduction and 2 exemptions. However, in making this election you must include your spouse's worldwide income but you can then elect the foreign earned income exclusion for your spouse if your spouse is employed and otherwise qualifies. If you do not elect to treat your non-American spouse as a U.S. resident, you can never-the-less claim an exemption for your spouse if she/he has no U.S. source income and is not the dependent of another U.S. taxpayer. If you are working abroad for a U.S. employer U.S. Income Tax is probably being withheld from your salary. You may have your employer discontinue this withholding by submitting a statement to your employer on Form 673 which indicates that you expect to quality for the foreign earned income exclusion.
If you estimate that you will still have a net U.S. tax liability in excess of $1,000, and it is more that 10% of the tax shown on your return after your foreign earned income exclusion and the foreign tax credit, you should make quarterly tax payments to avoid a possible underpayment of estimated tax penalty. These payments are due April 15, June 15, September 15 and January 15 of the following year.
Another report affecting most expats is the requirement to file a Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1). This information report includes any financial interest in, or signature or other authority over, a bank account, securities account, or other financial account in a foreign country with a value of $10,000 or more at any time during the year. This report is filed separately from your Income Tax Return and must be filed by June 30. There is no extension of time to file available for this report.
The above comments are intended to give a very brief overview of some of the more important and common tax rules affecting Americans living abroad. For those wishing to look further at these rules in detail, listed below are several sources which should contain answers to most questions and concerns.
For a very detailed explanation of the U.S. tax rules applicable to all Americas whether residing in the U.S. or abroad take a look at the Ernst & Young Tax Guide 2009—available at Amazon.com. It is revised annually with all the latest rules.
For detailed information from the IRS on U.S. tax rules applicable to Americans abroad click on
http://www.irs.gov/formspubs/
Publication 593, Tax Highlights for U.S. Citizens and Residents Going Abroad
Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
Publication 514, Foreign Tax Credit for Individuals
Publication 901, U.S. Tax Treaties Publication 17, Your Federal Income Tax
Publication 521, Moving Expenses