As a U.S. citizen living abroad, you may be wondering if you are still required to file taxes. The answer is YES. All U.S. citizens are required to file tax returns with the IRS and report 100% of their worldwide income every year. In this blog, we provide an overview of your filing obligations as a U.S. expat and discuss tax exclusions and credits that can reduce your U.S. tax liability.
The United States is one of only two countries that follows a citizenship-based tax system. This means that all citizens of the U.S. are taxed under the same personal tax system, regardless of whether they live in the U.S. or abroad. The only way to stop having to file, and for some expats pay, U.S. taxes is to renounce your U.S. citizenship.
With that said, paying taxes twice on the same income is a common concern for U.S. citizens working abroad. Luckily, expats can qualify for special credits, exemptions and deductions, allowing them to avoid double taxation on their annual U.S. tax return.
Foreign Earned Income Exclusion
One of the most valuable exemptions for expats is the Foreign Earned Income Exclusion(FEIE). For tax year 2022, FEIE allows expats to exclude up to $112,000 of their foreign earned income from their U.S. taxable income. This exclusion can be a significant tax break for expats and can help to reduce their overall tax liability.
Taxpayers qualify for this exemption in one of two ways:
Bona fide residence test – You must reside in a country for the entirety of a tax year, January 1st to December 31st.
Physical presence test – You must live in a foreign country for a full 330 days within a 12-month period.
Foreign Tax Credit
Another tax saving alternative for American expats is the Foreign Tax Credit (FTC). The Foreign Tax Credit allows expats to credit up to $300, $600 if filing jointly, of foreign taxes paid against their U.S. tax liability. This credit can help to offset some of the tax burden for expats who are paying taxes in both the U.S. and another country.
Generally, the following four tests must be met for any foreign tax to qualify for the credit:
You can’t claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit against the same income. You must choose one or the other. Work with your expat tax advisor to determine which one is most beneficial for you to claim.
Foreign Housing Exclusion
The Foreign Housing Exclusion allows U.S. taxpayers living abroad to write off overseas expenses associated with housing costs from their gross income on their U.S. tax return. This expat-friendly tax deduction can be used together with the Foreign Earned Income Exclusion.
Just like the FEIE, taxpayers must qualify under the bona fide residence test or the physical presence test.
If you qualify for the Foreign Housing Exclusion, the following expenses can usually be excluded on your U.S. tax return:
- Rent in a foreign country
- Utilities minus your phone, TV and internet
- Homeowner’s or renter’s insurance
- Property or leasing fees
- Furniture and parking rentals
- Rental repairs
Calculating the amount that can be excluded under the Foreign Housing Exclusion is complicated. Work with a professional expat tax advisor to make sure you are excluding the maximum amount allowed.
If you are an American expat, it is important to understand your tax responsibilities. The good news is that there are several resources available to help you navigate the complex world of international taxation. At Motl Accounting, we have extensive experience helping Americans living and working abroad meet their tax obligations. We can provide you with all the information you need to file your taxes accurately and on time.
We are here to help make this process as easy as possible so you can focus on living your best life overseas. Contact us today!