U.S. Taxes for Expats: What You Need to Know

 

 

Living abroad comes with countless perks—new cultures, exciting adventures and sometimes even better weather! But there’s one thing you can’t escape, no matter where you live: U.S. taxes. Many American expats are surprised to learn that the U.S. is one of the very few countries that taxes its citizens no matter where they live. But don’t worry, We’ll  break it down so you can handle your tax obligations with confidence

Do U.S. Expats Have to File Taxes?

 

  • Short answer:
    Yes.
  • Long answer:
    The U.S. follows a citizenship-based taxation system, which means that if you’re a U.S. citizen or Green Card holder, you must file a tax return every year regardless of where you live. Even if you don’t owe any taxes, the IRS still wants to know about your income. But here’s the good news:  because you have to file doesn’t mean you’ll necessarily owe anything. There are several tax benefits designed to prevent double taxation, which we’ll get into below.

The Foreign Tax Credit (FTC): Avoiding Double Taxation

One of the biggest concerns for expats is getting taxed twice—once by their country of residence and again by the U.S. That’s where the Foreign Tax Credit (FTC) comes in. Think of the FTC as a tax “discount” for Americans abroad. If you’ve already paid taxes to a foreign government, the U.S. allows you to claim a credit for those taxes, reducing what you owe to the IRS.

 

For example, if you live in a country with high tax rates (like Netherlands or France), you’ll likely pay more to your host country than you would to the U.S. In that case, the Foreign Tax Credit can wipe out your U.S. tax liability completely!

Who Qualifies for the FTC?

 

  • You have earned foreign income such as wages, self-employment income, etc.
  • You have foreign taxed passive income such as dividends, interest or capital gains.
  • You must have paid or accrued foreign taxes to a foreign government.
  • You must be subject to U.S. taxation on that same income.

 

When applying the FTC, it’s important to categorize the foreign income you’ve earned, as  each fills a different bucket. Foreign taxes paid on wages can be used to offset American taxes paid on wages. Foreign taxes paid on  investments only be used against taxes owed on other passive income. .If your foreign tax rate is lower than what you’d pay in the U.S., you may still owe something to the IRS, but the FTC can significantly reduce your bill.

 

Pro Tip: Using FTC will allow you the possibility for some other potential benefits like Child Tax Credits (CTC) and making ROTH IRA contributions.

The Foreign Earned Income Exclusion (FEIE): Tax-Free Earnings

 

The Foreign Earned Income Exclusion (FEIE) is another fantastic way to reduce your U.S. tax bill. This exclusion lets you exclude a certain amount of your foreign earnings from U.S. taxation. For 2024, the FEIE allows you to exclude up to $126,500 in foreign earned income. That means if you make less than this amount, you might not owe any U.S. taxes at all!

Who Qualifies for the FEIE?

 

To claim the FEIE, you must pass one of these two tests:

 

  1. The Physical Presence Test – You must live outside the U.S. for at least 330 full days in a 12-month period. If you were inside the U.S. for 35 days or longer, you can still have a prorated exclusion.
  2. The Bona Fide Residence Test – You must be a permanent resident of a foreign country for an entire tax year.

 

For the first few years, it is best to rely on the physical presence test before switching to the Bona Fide Residence test. It is hard to be considered a bona fide resident if you’ve only just moved there, after all. It’s also important to note the FEIE only applies to earned income (salaries, wages, freelance work), not passive income like dividends or rental income.

 

Pro Tip: If you stop using FEIE and switch to FTC, you cannot claim FEIE for another 5 years – yikes.

Foreign Bank Account Reporting (FBAR)

 

If you have more than $10,000 in foreign financial accounts at any point during the year (including checking, savings, investment, and retirement accounts), you must file an FBAR (Foreign Bank Account Report) with the U.S. Treasury. FBAR isn’t about taxation,it’s about financial transparency. The U.S. government wants to ensure that Americans aren’t hiding money overseas. Failing to file an FBAR can result in hefty penalties, so it’s crucial to stay compliant.

FATCA: Another Reporting Requirement

 

In addition to the FBAR, some expats must also file a FATCA (Foreign Account Tax Compliance Act) report if they have significant foreign assets.

 

  • Single filers (all non married joint) living abroad must report specified foreign assets over $200,000 at year-end.
  • Married filers (filing jointly) living abroad must report if their specified assets exceed $400,000.

 

Many foreign banks automatically report U.S. citizens’ accounts to the IRS, so it’s best to stay compliant rather than risk fines.

Filing Deadlines for Expats

 

Luckily, expats get extra time to file their taxes! For personal returns:

 

  • The standard U.S. personal tax deadline, to file and pay, is April 15.
  • Expats automatically get an extension to file until June 15 (interest will still accrue from April 15).
  • If you need even more time, you can request an extension to file until October 15.

 

Pro Tip: It is possible to get one more extension for Expats, but only in severe circumstances.

Need Help?

 

  • By taking advantage of tax credits and exclusions, you can avoid overpaying and keep more money in your pocket where it belongs!

 

  • This article is intended to give you an introduction to some of the key areas of US taxation while abroad; it is by no means a one size fits all. Each taxpayer’s situation has its own beautiful imperfections. We have been where you are and we are here to help.

 

  • You don’t have to navigate them alone! Many expats use tax professionals such as ourselves at BNC Tax & Accounting B.V. to help them traverse through the murky waters of U.S. taxation.

 

Published by: BNC Tax & Accounting B.V