Filing U.S. Taxes Living Abroad: What You Need to Know

July 31, 2017 | By: Kari Brummond, EA

filing u.s. taxes living abroadHave questions regarding filing U.S. taxes living abroad? The rules and requirements are a bit complex, but you need to understand the basics to get started. There are only two countries in the world that tax their citizens regardless of where they live—the United States and Eritrea. That means if you’re an American living abroad, you may need to file and pay income taxes.

Should You Be Filing U.S. Taxes Living Abroad?

If your income is over a certain level, you must file a tax return. As of 2017, if you earn more than $10,350 for a single person or more than $20,700 for a married couple filing jointly, you have to file a tax return. Even if you do not owe any tax, you still need to file.

What About Double Taxation?

If you live permanently in another country, you probably have to file a return and pay taxes there as well. In that case, you may be worried about double taxation. Luckily, the IRS has a program in place so you can avoid that. It’s called the foreign earned income exclusion.

Under this rule, you can earn a certain amount of foreign income without paying US income tax on it. You have to report the income, but the IRS gives you a credit to cover the taxes. As of tax year 2017, up to $102,100 in earnings can qualify for this exemption. If you’re a married couple filing jointly, you get double that limit. However, in order to qualify for the exclusion, you must meet certain residency requirements.

What Are the Residency Requirements for the Foreign Earned Income Exclusion?

You can qualify as a bona fide resident or based on physical presence. If you lived in the other country for all of the previous tax year, you are a bona fide resident. To pass the physical presence test, you have to spend at least 330 full days in the other country. The days don’t have to be consecutive.

Note: This exclusion does not apply to Armed Forces members or to civilian U.S. government employees

What About Funds in Foreign Bank Accounts?

The IRS also has special rules that require you to report funds in foreign bank accounts. Whether you live in the United States or abroad, you must file a foreign bank account report (FBAR) if you have more than $10,000 in a foreign bank account. That includes bank accounts, mutual funds, bonds, notes, and foreign life insurance annuities as well as other accounts.

This threshold applies to the total in all your foreign accounts. If the total is over $10,000 on any day in the tax year, you have to file this report. This rule is in addition to the rules above.

When Is Your Tax Return Due If You Live Abroad?

The good news is you have extra time to figure all this out. When you live abroad, you get an automatic two month extension. Your tax return is not due until June 15 or the next business day if that date falls on a weekend or holiday. If you need even more time, you can request an additional two month extension using Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return).

How Do You Deal With Exchange Rates?

When you report foreign income or expenses, you have to convert those amounts to US dollars. You can use the average exchange rate for the year, or if you know the date the transaction occurred, you can use the exchange rate for that day.

How Do You File Taxes From Another Country?

You can use tax prep software to file from abroad. Most software asks you questions and then enters the information in the appropriate forms. Then, you can submit electronically or print off the returns and file them.

If you make under a certain amount, you can e-file through the IRS’s site for free. Finally, you can fill out paper returns on your own or have a tax professional help you.

These basics should point you in the right direction. The most important takeaway is this—if you live abroad, don’t forget to file. If you’re behind on filing, you may want to contact a tax professional to see what steps to take.