Understanding Tax Reporting for U.S. Citizens Living Abroad

U.S. citizens move abroad for lots of different reasons—a better quality of life in retirement, a career opportunity, to explore, or for love of a particular person or place—but all expats share one very important trait: a sense of adventure.

However, moving abroad involves lots of logistical planning, and financial considerations should always feature near the top of the list, including the requirement that U.S. citizens must still file U.S. taxes after their move overseas.

U.S. Tax Rules for U.S. Citizens Living Abroad

The U.S. has a citizenship-based taxation system. It’s the only developed nation that has this sort of tax system, rather than a residence- or territorial-based system.

Residence-based tax systems tax only residents in that country, while territorial-based systems tax only income and economic activity within that country, whether the income is earned by a resident or not. The U.S., on the other hand, taxes all U.S. citizens, wherever in the world they may be.

This raises multiple questions for U.S. citizens abroad: What happens if they have to file foreign taxes in their host country, too? Will a tax treaty protect them from double taxation? What about Social Security taxes?

U.S. citizens living abroad do have to file two tax returns if their host country requires them to file, and, while the U.S. does have tax treaties with over 60 other countries, they don’t prevent U.S. citizens abroad from having to file.

They do, however, contain ways in which U.S. expats can avoid double taxation. The most common way is by claiming tax credits when they file their U.S. tax return in lieu of foreign taxes they have to pay abroad.

The most common way to do this is for expats to file their foreign taxes first and then their U.S. taxes. When they file their U.S. taxes, they file an additional form (Form 1116) to claim the U.S. Foreign Tax Credit.

In some circumstances, U.S. citizens abroad would file their U.S. taxes first and then claim tax credits abroad, if their income is considered U.S.-sourced, for example.

Specific tax treaties do allow for some types of income to be exempted from U.S. tax in certain circumstances, most often pension, dividend, or income from royalties, depending on the tax treaty. Expats who wish to take advantage of a specific tax treaty provision must claim it on Form 8833 when they file their U.S. tax return.

Exclude $108,700 of your income from U.S. tax.

Alternatively, the U.S. has a provision called the Foreign Earned Income Exclusion, which can be claimed on IRS Form 2555. In 2021 it allows U.S. citizens abroad to simply exclude the first $108,700 (the exact amount varies each year) of their earned income from U.S. taxation. This provision is useful for expats who don’t qualify to pay foreign tax abroad, or who pay foreign taxes at a lower rate than the U.S. rate (and for whom claiming the Foreign Tax Credit would still leave them owing U.S. tax).

In terms of Social Security taxes, the U.S. has treaties called totalization agreements in place with a number of countries that mean U.S. citizens living in one of these countries will only pay Social Security tax to either the U.S. or their host country, depending on how long they plan to live abroad. U.S. citizens in other countries who are either self-employed or who are employed by a U.S. company may find themselves at risk of double Social Security taxation.

With the right preparation, moving abroad can save you unnecessary taxes. © Hugo Ghiara/International Living

Countries with which the U.S. has signed a totalization agreement are Australia, Austria, Belgium, Brazil, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, Slovenia, South Korea, Spain, Sweden, Switzerland, the U.K., and Uruguay.

U.S. citizens abroad also have to report their foreign registered business interests.

U.S. citizens living overseas receive an automatic filing extension until June 15, although any tax they do owe still needs paying by April 15. Those who require additional time to file after June 15 can also request an extension to Oct. 15 by filing Form 4868.

FBAR Reporting

FBAR is an acronym for Foreign Bank Account Report. Filing an FBAR is an additional U.S. reporting requirement for many U.S. citizens who live abroad.

FBAR reporting affects U.S. citizens who have foreign registered financial accounts, whether they live in the States or abroad. Foreign financial accounts include any type of account with a positive balance, including all bank accounts and most types of investment and individual pension accounts.

Whether U.S. citizens with foreign registered financial accounts have to file an FBAR or not depends on whether the aggregate total of all of the balances of all of their qualifying accounts exceeded $10,000 in total at any time in the year. So, an American with 10 qualifying accounts that all had $1,001 in them—even if just for a few minutes—would have to file an FBAR to report all of their foreign financial accounts.

Qualifying accounts also include any account that a U.S. citizen has signatory authority over, such as joint accounts and business accounts, even if the account isn’t registered in their name.

The requirement to file an FBAR was introduced as part of the 1970 Tax Secrecy Act to help prevent offshore tax evasion. Somewhat controversially though, the $10,000 threshold has never been increased in line with inflation.

FBARs are filed to FinCEN, the financial crimes authority, rather than to the IRS, which means that penalties for not filing an FBAR are much higher. These start at $10,000 a year for unintentional missed filing or unintentional omissions or errors on the form.

Penalties for intentional, willful evasion of FBAR filing can rise to $100,000 a year or half of the balances of all the foreign accounts. There have been cases of FBAR penalties reaching millions, notably that of former presidential advisor Paul Manafort.

The FBAR form itself is FinCEN Form 114, and it should be filed online by April 15. However, there is an automatic filing extension until Oct. 15 to bring the FBAR filing date in line with the wider U.S. tax return filing extension date.

FinCEN Form 114 is filed on the FinCEN website through the BSA filing system. It’s not an overly complex form to file, so long as you have the relevant financial account statements on hand. The information the form requires includes the financial institution name and address, account name and number, and maximum account balance in the year for each qualifying foreign financial account.

FATCA Reporting

Since the requirement was introduced, many U.S. citizens living abroad neglected to file FBARs either because they were unaware of the requirement, or because they assumed that the IRS had no way of knowing what was in their foreign accounts and so wouldn’t find them.

This was in fact the case up until 2010, when the Foreign Account Tax Compliance Act was made law. More commonly referred to as FATCA, the act contained two provisions that affect expats.

Firstly, it leverages the U.S. global financial hegemony by compelling every foreign bank and investment firm to provide the U.S. Treasury with the personal and account information (including balances) of their accountholders who are U.S. citizens. Those financial firms that don’t comply face a steep tax on transactions they make in U.S. financial markets.

The result of this has been that almost every financial firm globally now provides the U.S. with this information, allowing the IRS to check it against information provided on FBARs or to see whether an FBAR should have been filed but wasn’t.

The fact that many U.S. citizens with financial accounts abroad who aren’t filing FBARs haven’t been contacted yet is due to the sheer volume of information that the IRS is receiving. For this reason, so far, it has been focusing on making examples of high net-worth U.S. citizens. However, it is now developing software to better sort the information that it is receiving.

FATCA also created a new filing requirement for U.S. citizens with foreign financial assets. This means that U.S. citizens living overseas who have a total value of financial assets abroad worth over $200,000 at any time during a year have to report them by filing IRS Form 8938 as part of their U.S. federal tax return. (Note that the filing threshold varies with filing status and residence abroad.) Foreign financial assets include bank and investment accounts, as well as foreign personal pension accounts and investments in a foreign business.

It is because there is a certain amount of crossover between the FATCA and FBAR reporting requirements that they are often mentioned together, and that there is a certain amount of confusion about them.

Because it has a lower account value threshold, many more U.S. citizens are required to file an FBAR than IRS Form 8938. However, U.S. citizens who meet the minimum account and asset values for both must file both FinCEN Form 114 and IRS Form 8938.

Seek Advice

U.S. citizens living abroad almost always benefit from seeking advice from a U.S. expat tax specialist to ensure that they not just get and stay compliant but also file in their best interests.

With additional forms involved (and often currency conversions too), filing from abroad is more complex than filing in the States.

U.S. citizens who live abroad and who haven’t been filing U.S. taxes because they weren’t aware that they had to, may be able to catch up without facing penalties under an IRS amnesty program, so long as they do so before the IRS contacts them about it.

Allyson Lindsey is a Managing CPA and Partner at Bright!Tax and a leading expat tax expert. Bright!Tax is a leading provider of expat tax services for U.S. citizens living abroad.

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