Many US taxpayers live overseas for a variety of reasons. For some, it is a dream come true. For others, it is an employment opportunity or familial obligation. But regardless the reason, it’s important for those who do to still abide by their US tax obligations, in addition to any foreign country tax filing requirements.
Here are seven common questions that often arise before or after someone moves to a foreign country to consider.
1. Why Do I Need to File a Return?
US citizens living abroad must file tax returns because the US taxes its citizens on their worldwide income. In addition, those living overseas need to file a tax return to claim any tax benefits (including treaty benefits) they qualify for, including the:
- Foreign earned income exclusion
- Foreign tax credit
- Child Tax Credit
- Credit for other dependents, and
- Credit for child and dependent care expenses
These tax benefits are not automatic and are available only if a US tax return has been filed. Even if these or other tax benefits substantially reduce or eliminate one’s federal tax liability, US citizens must still file.
Taxpayers who relinquished their US citizenship or ceased to be lawful permanent residents of the United States must file a dual-status alien tax return and attach Form 8854, Initial and Annual Expatriation Statement.
2. When is the Filing Deadline?
Unlike US residents whose tax returns are usually due on April 15, US citizens living overseas typically have until June 15 to file their returns each year. Such taxpayers should adhere to this deadline if:
- Both their tax home and residence are outside the United States and Puerto Rico, or
- They are serving in the military outside the United States and Puerto Rico on the regular due date of their returns.
Eligible taxpayers should attach a statement to their return when filed indicating they qualify for such an extension.
3. What if I Cannot File by the Deadline?
US taxpayers living overseas who cannot meet the June 15 deadline can request an extension. They should file their extension requests electronically to avoid processing delays.
Otherwise, individual taxpayers can request an extension by filing Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return. Businesses must file Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.
In 2022, the extended due date for individual returns is Oct. 17, because the usual Oct. 15 deadline falls on a Saturday. However, under certain circumstances, members of the military on active duty may qualify for an additional extension of at least 180 days to file and pay taxes.
4. How Should I Pay My Taxes?
For taxpayers living overseas, the best way to pay US taxes is electronically, if possible Taxpayers may pay their tax bills via their Internal Revenue Service (IRS) account online or by using IRS Direct Pay.
It’s important to note, any income received or deductible expenses paid in foreign currency must be reported on a federal tax return in US dollars. Likewise, any tax payments must be made in US dollars.
5. Do I Need to File Any Special Forms?
US citizens with a foreign bank or financial account need to file Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This reporting requirement is separate from, and in addition to, any reporting required either on Form 1040, Schedule B; or Form 8938, Statement of Specified Foreign Financial Assets. The FBAR is not filed with the IRS, but is filed electronically using the Bank Secrecy Act filing system.
Taxpayers need to file an FBAR if they had an interest in, or signature or other authority over, one or more foreign financial accounts whose aggregate value exceeds $10,000 at any time during any calendar year. This might include signatory authority over a foreign bank account of the individual’s employer for whom they are working. Because of this low threshold, taxpayers with any foreign assets should determine whether the FBAR reporting requirement applies to them, as the penalties for failing to file are steep.
In 2022, the original FBAR due date was April 18; the FBAR is due April 18 each year, however, an automatic extension is granted to Oct. 15 for anyone who missed the original deadline.
6. If I File an FBAR, Do I Need to File Anything Else?
In addition to filing an FBAR, certain taxpayers also need to file Form 8938. US citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds which are based on an individual’s filing status and tax home.
Federal law requires US citizens and resident aliens to report worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Form 1040, Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts. It usually requires US citizens to report the country in which each account is located.
Both the FBAR and Form 8938 require the use of a Dec. 3 exchange rate for transactions, regardless of the actual exchange rate on the date of the transaction. The IRS accepts any posted exchange rate for Dec. 31 that is used consistently.
7. Who Can Help?
For any US taxpayer who is about to head overseas to live, or already has, Moore Doeren Mayhew can be an invaluable resource for identifying tax issues before moving or filing tax returns properly once there, as tax return complexities normally increase exponentially for expatriates. Contact our international tax advisors today.
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