When it comes to expat taxes for American citizens living abroad, the questions can mount up pretty quickly. The ways in which your life overseas interacts with your duty as an American taxpayer gets very complicated, which is why so many expats have many questions about how to stay compliant with the IRS without paying too much. Here are some answers to the most common questions expats have about expat taxes in US.
Q: What qualifies as foreign income?
In general, there is a three-step test to see if your income counts as foreign income for the purposes of expat taxes. First, your tax home must be in a foreign country. From there, you must meet either the bona fide residence test or the physical presence test, which are thresholds for how much time you spent outside of the United States in a period of 12 consecutive months. Finally, your income does not necessarily need to be from a foreign source, like a company whose headquarters are outside the United States, but can come from an American employer working overseas.
Q: What does not count as foreign income?
A: In general, the above is all you need for your income to count as foreign, but there are notable exceptions, as outlined by the IRS. These exceptions include:
-Food and lodging provided by your employer.
-Pension payments or annuity payments. These include social security benefits.
-Payments from the United States Government or any American governmental agency to its employees.
-Moving expenses.
-Payments received after the tax year in which you performed the service that earned you the foreign income.
Q: When do I need to file?
The IRS has generously extended two extra months to file your taxes every year if you meet certain criteria for being an expat. In general, this means your year-end filings need to be filed by June 15 instead of the usual April 15. The provisions for this are quite strict, however, and only apply if you are “a U.S. citizen or resident alien residing overseas, or if you are in the military on duty outside the U.S. on the regular due date of your return.”
Q: Can I pay in my current country’s currency?
The short answer is no. All taxes must be paid in U.S. dollars and not in Euros, Canadian dollars, or any other foreign currency. In general, taxpayers use the annual average to figure out their conversion rate, which most experienced expat taxes experts can provide. If your financial dealings were on specific days, it may be beneficial to use the exchange rate of that day. Tax experts can help you locate that number as well.
Q: If I’m living overseas, do I need to pay American taxes?
If you are an American citizen or green card holder who is living and earning income outside of the United States, you may still be required to file and pay taxes. You may qualify for foreign earned income exclusions or foreign income tax credits, but these are assessed on a case-by-case basis, depending on your income, type of income, and status as an American. In general, if you are a U.S. citizen or a resident alien living outside the United States, you are required to file and pay taxes to America.
Q: I married someone overseas and have a child born outside of the US. Does this change my filings?
In general, you can claim spouses and dependents for tax purposes if you meet the following criteria. According to the IRS, in order to be claimed as a dependent, “the individual must be a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins.”
Q: Do I still need to file my foreign income if it falls below the foreign income exclusion threshold?
A: The short answer is yes. Since the exclusion is voluntary, you need to file it in order to qualify, even if what you earn is below that amount.
Expat taxes are extremely complicated, especially as your international finances become more complex. This is why many expats and people with sources of income overseas are turning to experienced tax experts to help them file with the IRS. If you have questions or concerns about your taxes, be sure to contact professional, experienced tax firms with overseas expertise. They can help you stay compliant without paying more than you should.
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