What is your tax responsibility as an American abroad? Sure, you may have to cover local foreign taxes as you live your life overseas, but you may also have to file US taxes. It all depends on your unique tax situation and whether or not you reach the filing threshold. Today, we’ll break down 5 things US expats need to know about taxes in 2021!
- You Must File US Taxes if You Reached the Tax Filing Threshold
If you as an American expat earn worldwide income that reaches the tax filing threshold, you’ll need to file a US tax return. It’s the truth, folks. The United States and Eritrea are the only two countries in the entire world that taxes their citizens no matter where they living globally. This means it doesn’t matter if you’re living and working in isolated Antarctica – you may be legally obligated as a US citizen to file US taxes.
What types of foreign income are included in reporting worldwide income to the IRS? Common types include, but is not limited to:
- Salaries and Wages
- Self-Employment Income
- Interest
- Rental Income
- Dividends
- Capital Gains
Some tax filing thresholds for the 2020 tax season (in year 2021) is $12,400 for single filers, and $24,800 for married filing jointly. If you are married to a foreign spouse and want to file separately, you only need to earn $5. Yes, $5 – to be legally required to file US taxes!
How do you file US taxes as an expat? You can do so manually by printing, filling out and mailing the paper forms. Or you can take the easy route by walking through the MyExpatTaxes software! It’s easily built and designed for Americans abroad to complete US tax filing in under 30 minutes.
Make sure to file your taxes by the filing deadline. For Americans abroad it’s June 15, since there is an automatic extension deadline for US expat tax filers. Keep in mind, if you do owe taxes, you will still need to pay by April 15th to avoid interest and fees.
- Americans Abroad May Have to File State Taxes
It may be possible that you as an expat have to file state taxes too. It depends on the state you last lived in before you moved abroad, and whether they believe you’re still a resident or not.
The need to file a state tax return is determined by three factors:
- The legitimacy of your legal residence abroad.
- If you maintain or have a permanent residence in your former US state
- If you are still making income in your state and thus owe state taxes as an expat
For example, if you are renting out your Manhattan rental while living and working abroad, New York claims your home as their property – and thus if you earn income from that rental, you’ll need to report it for state taxes.
Still unsure whether you should file state taxes? The MyExpatTaxes support team can help answer that for you.
3. Expats Most Likely Don’t Owe US Taxes
The good news is that American expats typically don’t need to pay US taxes on their foreign income. It all comes down to some pretty cool expat tax benefits Americans can apply on their tax return every year:
Three expat tax benefits for Americans abroad are:
- Foreign Earned Income Exclusion: Expats can exclude up to $107,600 of foreign sourced income on their 2020 tax return.
- Foreign Tax Credit: Usepaid foreign income tax as a credit against your tax bill. For example, if you paid 200 Euros to the German government as a resident of their country, you can generally take that amount say, 250 USD and apply it to any US taxes you owe.
- Tax Treaty Benefits: You can use a US tax treaty provision with their foreign host country to exempt certain income from US taxation.
Utilizing and applying these benefits help expats prevent double taxation and other unnecessary expenses when tax season arrives.
4. Not Filing Comes with Tax Penalties – Including loss of US passport
Unfortunately, if you don’t file your US taxes on time, the IRS can start collecting old tax information from you – including information from when you were still living in the states. They can use this process to create a mock up tax return, approximating how much taxes you may need to file and owe. In most cases, they will not apply any tax benefits so you could pay more than you should.
The IRS will send out letters of warning if you failed to file. Plus they can add penalties for not filing, increasing the fines to be in the thousands. In severe cases your passport can be denied for renewal, but the State Department can give you a temporary one if you need to return to the US and finish your tax duty.
While those are more extreme cases, it is important to reiterate the importance of filing your taxes in on time. However, there are – fortunately – ways to make up for lost years and taxes, which is explained in the next section below.
5. You Can Make Up Years of Missed Taxes – Penalty Free
There is a tax amnesty program for expats who haven’t filed in a long time and are terrified of tax penalties. It’s called the Streamlined Procedure.
It’s a creation by the IRS and was developed in 2014 to help taxpayers catch up on taxes. If expats qualify, they won’t be subject to penalties, and allows them to file amended returns too.
Basically, the Streamlined Procedure is for expats who honestly forgot to file US taxes or had a personal circumstance which prevented them from filing on time.
American expats are eligible for the Streamlined Procedure if they:
- Haven’t filed a federal tax return in at least 3 years
- Haven’t filed the FBAR in the last 6 years.
- Did not live in a home in the US for the last 3 years
- Were living outside of the US for at least 330 days in one of the last 3 years. There is an exception due to the pandemic, as we outlined in the Physical Presence test
- Haven’t filed delinquent or amended tax returns
MyExpatTaxes has one of the most affordable Streamlined packages available to Americans abroad. Youtube influencer Aspen of AspenAbroad shared her personal experience on this program and how easy it is for expats.
US Expat Taxes Support
If you would like to learn more about US expat taxes, check out this handy tax guide that has everything from self-employment taxes to extended filing deadlines. Once you’re ready to get started, sign up into the MyExpatTaxes app and complete your taxes in no time for only 149 Euro!
