US Expat Tax: A Close Look
Expatriate Tax Law
As a U.S. citizen or resident alien, your worldwide income is subject to U.S. income tax regardless of where you live. You must file a tax return to claim exclusions for foreign earned income and housing. You can also claim a tax credit or deduction for foreign income taxes paid, reducing your U.S. tax liability under certain tax treaties.
Income Earned Abroad
You may qualify for a foreign earned income exclusion if you perform services outside the U.S. To qualify, your tax home must be abroad, and you must meet either the bona fide residence test or the physical presence test.
Tax Home
Your tax home is where your main place of business is located. It cannot be in the U.S. while your abode is there. Exceptions apply if you leave a foreign country due to war, civil unrest, or similar conditions.
Travel Restrictions
Violating U.S. travel restrictions disqualifies you from claiming foreign residency or income exclusions. Current restrictions apply to Cuba, Libya, and Iraq.
Exclusion of Foreign Earned Income
If your tax home is abroad and you meet residency or presence tests, you can exclude a limited amount of foreign earned income. This does not include income from U.S. government employment.
Foreign Credits and Deductions
If you claim the foreign earned income exclusion, you cannot claim credits or deductions related to the excluded income, including foreign tax credits.
Foreign Amount Excludable
You can exclude a limited amount of foreign earned income if you qualify for the entire year, or a prorated amount if you qualify for part of the year.
Foreign Housing Exclusion
If you meet the residency or presence test, you can exclude or deduct housing costs above a base amount. This includes rent, utilities, and insurance, but not home purchases or capital expenses.
Housing Deduction
Self-employed individuals can deduct housing expenses, limited by their foreign earned income minus excluded amounts.
Foreign Housing Carryover
Unused housing deductions can be carried over to the next year but not beyond.
Choosing the Exclusion(s)
You can choose to exclude foreign earned income and housing amounts, but the exclusion choice remains for the year and future years unless revoked, requiring IRS approval for re-claim within 5 years.
Foreign Income Taxes
You can claim a credit or deduction for foreign taxes paid, but you must treat all foreign taxes the same way.
Foreign Tax Credit
Complete Form 1116 to claim a foreign tax credit, limited to the U.S. tax liability on foreign income.
Foreign Tax Limit
The foreign tax credit is limited to the U.S. tax attributable to foreign income. Unused credits can be carried back 2 years and forward 5 years.
Foreign Tax Deduction
Itemize deductions on Schedule A if you choose to deduct foreign taxes, but not on excluded income.
Self-Employed Persons Abroad
File a U.S. return if you earn $400+ from self-employment, subject to self-employment tax even if income is excluded.
Estimated Taxes While Abroad
Pay estimated tax if foreign employers don’t withhold U.S. tax. Use Form 1040 ES.
US Withholding Tax
You can stop withholding if you expect to qualify for exclusions. Withholding applies to pension payments unless you choose exemption with a valid taxpayer ID and U.S. address.
Filing Extensions While Abroad
If your tax home and abode are abroad, you automatically get an extension to June 15. You can file Form 2350 for additional extension if needed.
Foreign Bank & Financial Accounts
File Form 114 if you have financial interests in foreign accounts exceeding $10,000.
Tax Agreements for Expatriates
Check host country agreements for specific tax status. Tax treaties may provide credits, deductions, and exemptions to reduce foreign taxes.
Social Security Totalization Agreements
These countries eliminate dual social security taxation: Austria, Belgium, Canada, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom.
Information Exchange Agreements
These countries share information with the U.S.: Barbados, Bermuda, Colombia, Costa Rica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Marshall Islands, Mexico, Peru, St. Lucia, Trinidad and Tobago.
