US citizen living abroad taxes | Everything you need to know

The phrase, ‘The only things certain in life are death and taxes,’ is entirely accurate for Americans. Even living outside the United States does not exempt them from the requirement to file taxes. If you are a US citizen living outside the US, you must file a tax return every year, just like any other American, unless you earn less than the minimum income. Here’s why US citizens living abroad must pay taxes.

Why do US citizens living abroad need to pay taxes?

If you are a US citizen living abroad, you must file a US federal tax return and pay US taxes on your worldwide income regardless of where you live at the time. In other words, you apply the same income tax rules as those in the United States.

While nearly all 244 sovereign territories use territorial, residence, or no income taxation, only two countries, the United States and Eritrea use citizenship-based taxation.

What are other types of taxation?

When taxing individual income, it’s safe to say that the United States takes a somewhat unique approach to other countries that tax income.

The governments commonly use two systems of taxation- territorial-based and residence-based taxation.

Countries with territorial-based taxation, such as Singapore and Lebanon, tax individuals only on income they earn within the country’s borders. Countries such as Germany and France use residence-based taxation to tax residents on all income earned from domestic and foreign sources. The government taxes non-residents only on local income, similar to the territorial-based system.

How much tax should you pay if you work overseas?

The government taxes foreign income at the same marginal rate as domestic income in the United States.

This means that you, as an American living abroad or a Green Card holder, will have to file a US federal tax return this year if your total income in 2021 exceeds any of the following minimum thresholds, irrespective of where you earn the income (and in what currency)-

For citizens filing as Single-

• 12,550 USD if under age 65
• 14,250 USD if age 65 or older

For citizens filing as Married filing Jointly-

• 25,100 USD if both spouses are under age 65
• 26,450 USD if one spouse under age 65 and one age 65 or older
• 27,800 USD if both spouses are age 65 or older

Citizens filing as Married Filing Separately-

• 5 USD

As Self-Employed-

• 400 USD

For citizens filing as head of household-

• 18,800 USD if under age 65
• 20,500 USD if age 65 or older

For citizens as qualifying widow(er)s with a dependent child-

• 25,100 USD if under age 65
• 26,450 USD if age 65 or older

As a result, the IRS (Internal Revenue Service) still expects you to file a tax return even if you did not live in the United States at any point during the year and earned all of your income in another country.

You might be able to reduce your US citizen tax 

The good news is that several exemptions or deductions are available to keep ex-pats from owing money on their annual US tax returns.

In 2022, the Foreign Earned Income Exclusion (FEIE) allows eligible Americans living abroad to exclude up to 108.700 dollars of income earned outside of the United States on their 2021 tax return. As an American ex-pat, you can also claim the Foreign Tax Credit (FTC), which allows you to deduct income taxes you pay to other countries.

There are even more expat-friendly tax breaks, such as the Foreign Housing Exclusion, which allows Americans living abroad to deduct housing costs in the United States. International Tax Treaties can also be used by those knowledgeable about US taxes to exempt certain income from US taxation.

Refund for ex-pat parents via Child Tax Credit

If you have children, you may be eligible for a tax refund. In 2022, parents living abroad with children with an American social security number can claim up to $3,000 on their 2021 tax return. However, remember that the $3,000 is only available to those who have lived in the United States for more than half of the year in 2021.

Don’t worry if you were an ex-pat for the entire year. You can still get a refund, but not the whole 3000 dollars.

What if US citizens living abroad don’t file for taxes?

US citizens who fail to file US taxes while living in another country may face penalties, interest charges, and even criminal charges. The IRS imposes late filing and late payment penalties. If your failure to file is willful, and you knowingly avoided your US tax obligations while living abroad, you may face more serious legal consequences.

• Failure to file penalty- 5% of the unpaid taxes for each month the tax return is late, up to 25%
• Failure to pay the penalty- 0.5% of the unpaid taxes for each month the tax payment is late, up to 25%
• Over 60 days late- The maximum for this penalty is 25% of your unpaid taxes.

Luckily, the IRS provides a penalty-free way for Americans living abroad to get caught up if they don’t realize the need to file US taxes while living abroad. Irrespective of how many years you’ve missed, the Streamlined Filing Procedures only require you to file the previous three years’ worth of Federal tax returns and the previous six years’ worth of FBARs (Foreign Bank Account Reporting). This makes the process simpler and less expensive way to abide by.

Key takeaways

• If you are a US citizen living abroad, you must pay taxes to the US government.
• In 2022, the FEIE allows qualifying Americans living abroad to exclude up to 108.700 dollars of income they earn outside of the United States on their 2021 tax return.
• You will be severely penalized if you fail to pay the taxes.
• Foreign Tax Credit and Child Tax Credit can help you reduce some of your taxes.

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FAQs

Q1. What is the due date for your US income tax return?

Answer- The due date for filing your federal individual income tax return is usually April 15 for each calendar year.

Q2. How can you get a transcript for your current and previous years?

Answer- You can obtain copies of tax records, such as transcripts of previous tax returns, tax account information, wages, income statements, and letters of verification of non-filing, by visiting ‘Get Transcript’ on the official IRS website.

Q3. How should a US citizen living abroad pay taxes?

Answer- Electronic payment of US taxes is the best option for taxpayers living abroad. Taxpayers can pay their tax bills online through their IRS account or IRS Direct Pay.