Individual Federal Income Tax

If you are a US citizen or Greencard holder living abroad then you must file a US tax return each year. In most instances, regardless of whether you earn income in the US or your foreign country of residence, it is vital that you file an annual US tax return.

It is important to note that most cases are 'informational' and NO tax will need to be paid. It is merely a tax compliance requirement of the IRS.

Your U.S. Income Tax Obligation while Living Abroad

As a U.S. expatriate residing abroad, you have a legal obligation to file U.S. tax returns each year on your worldwide income.

When moving overseas, one of the biggest questions many have concerns Expat Tax. Unfortunately, America is one of a handful of countries that vigorously pursues taxes worldwide – so don’t expect to avoid a U.S. tax debt by moving overseas. As a matter of fact, you’re not even allowed to give up your U.S. citizenship to eliminate a tax obligation.

Be aware that America has tax treaties with over 42 countries where the IRS and the foreign tax agencies exchange tax data on their residents. Many Americans think because they’re earning money in another country – and paying that country’s taxes – they have no liability when it comes to their home country and that they are not required to pay expat tax USA. That’s totally not the case.

You still should file a return with the U.S. every year, whether you have income or not. You are not legally required to do so if you don’t owe U.S. taxes, but it’s an important preventative measure as there is a Statute of Limitations on tax disputes. If there is a dispute over back taxes, you start running out the clock on the Statute of Limitations if you file. If you don’t, the IRS can conduct a personal audit at any time in the future and you’ll be liable if they decide against you.

When to File?

If your tax year is the calendar year, the due date for filing your income tax return is usually April 15 of the following year.

Extensions of Time to File

You are automatically granted an extension to June 15 to file your return and pay any tax due if you are a U.S. citizen or resident, and on the regular due date of your return: You are living outside of the United States and Puerto Rico, and your main place of business or post of duty is outside of the United States and Puerto Rico, or You are in military or naval service on duty outside the United States and Puerto Rico.

Foreign Earned Income Exclusion

If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction.

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation.

To claim the exclusion, the taxpayer must have a tax home in the foreign country and must satisfy either the foreign residence or physical presence test. US government employees may not claim any exclusion for government pay earned abroad.

Foreign Residience Test

The foreign residence test is satisfied by a US citizen who is a bona fide resident of a foreign country for at least 1 full tax year. This also applies to a US resident alien who is a citizen of a country that has an income tax treaty with the US and meets the full-year foreign residence test. Business or vacation trips outside of the country, including to the United States, does not disqualify the taxpayer from satisfying the foreign residence test.

A bona fide resident of a foreign country is one who takes actions that would indicate an actual relocation to the country, including:
• Bringing the family;
• Buying a house or renting an apartment rather than going to a hotel room;
• Having a permanent foreign address;
• Joining clubs there;
• Opening charge accounts and stores in the foreign country; and
• Participating in foreign community activities.

However, a taxpayer who does not qualify as a bona fide resident can still qualify under the physical presence test.

Physical Presence Test

To meet the physical presence test, you must be physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. While the months must be consecutive, the days do not. What this means is that you are limited to a maximum of 35 days in the United States during the 12-month qualifying period. Full days are defined as a 24-hour period beginning at midnight.

Time spent on or over international waters in transit to or from the United States does not count towards a day present in a foreign country. You can count all full days you spent abroad for any reason. Whether you spent days in a foreign country or foreign countries for personal or business reasons are not relevant, however you must spend each of the 330 full days in a foreign country.

Foreign Tax Credits

You may have income for which you’ve paid foreign tax, but that cannot be excluded from U.S. taxation. The foreign tax credit is intended to reduce a double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.

If you had foreign source income that you paid (or accrued) foreign taxes to a foreign country, and now you are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.

Taken as a deduction, foreign income taxes reduce your U.S. taxable income.

Foreign Housing Exclusion or Deduction

In addition to earnings exclusions, some expatriates may be eligible for tax breaks based upon their housing costs. It is possible for US citizens to exclude a portion of the money they spend on rental or property costs. The foreign housing exclusion allows expats to offset some of their living costs against their tax payment.

Persons who live and work outside the United States can exclude from federal income tax amounts paid by their employer for housing. This includes any amounts paid directly to the taxpayer or on the taxpayer's behalf for housing, rent, education for the taxpayer's children, or tax equalization ("gross up") payments.

Qualifying Expenses

The following expenses qualify for the foreign housing exclusion:
• Rent
• Fair rental value of housing provided by the employer
• Repairs
• Utilities other than telephone
• Real property and personal property insurance (homeowners & renters insurance)
• Occupancy taxes
• Nonrefundable security deposits or lease payments
• Furniture rental
• Residential parking fees

Additionally, taxpayers may be eligible to exclude housing amounts paid by their employer. Employer-provided amounts include:
• Tax equalization payments paid by your employer
• Education expenses for your dependent children

Non-Qualifying Expenses

The following expenses do not qualify for the foreign housing exclusion:
• Lavish or extravagant expenses (as determined by a person's circumstances)
• Deductible interest and taxes (for example mortgage interest)
• Cost of buying property (for example, principal payments on a mortgage)
• Domestic labor (for example, maids and gardeners)
• Pay television
• Home improvements
• Purchased furniture
• Depreciation of property or improvements.