The United States requires all citizens and permanent residents (that is, green card holders) to file the U.S. Federal income tax returns. The U.S. is fairly unique in this regard, so take note: you must still file your tax return even if you move out of the country and are currently living abroad. Even if you have not earned any U.S. income!
How much money are we talking about?
Filing requirements are based on total income before exclusions or deductions. In 2010, the cutoff was $9,350 for filing individually or $18,700 for married and filing jointly. Learn more about filing status of married couples in a situation where one of the spouses is not a U.S. citizen or resident at Foreign Spouse of U.S. Citizen.
If you file a return, that does not automatically mean you owe taxes! There are a number of exclusions provided in the tax return system to take advantage of. To start, Form 2555 provides a Foreign Earned Income Exclusion section which allows you to exclude up to $91,500 of foreign salary. This exclusion can be increased based on your overseas housing costs. (Typically, the baseline is around $40.11 per day, so any costs in excess of this can be deducted.)
Form 1116 provides yet another medhot of reducing or eliminating your U.S. tax bill,Foreign Tax Credit. Depending on how much you paid in foreign income tax, you can claim up to the entirety of your U.S. foreign source income tax. This means you could owe 0 U.S. income tax! This credit will be reduced if you also claim the exclusion, however.
You can only take advantage of these credits and exclusions if you file a tax return! And consider: it's possible to earn over $100,000 and pay no U.S. tax, so it's in your best interest to apply. Your exclusion may be denied if this is a first time claim and your return is late, so be aware of deadlines.
Ok, so when is it due and where do I go?
Fortunately for expatriates, federal tax returns for those living outside of the U.S. are due on June 15, rather than April 15. No extra paperwork-- you automatically get this extension if you attach a statement to your tad return explaining that you had an extended deadline because, as an expat, you were out of the country as of April 15th. Still need more time? You can file Form 4868 for an automatic extension until October 15 or, in case you need extra time to qualify for the foreign earned income exclusion, form 2350.
You can submit your tax returns in a number of ways:
- Through your nearest U.S. Embassy or Consulate. This may not be the most reliable method, so make sure the personnel there know where to send your return.
- Mail or delivery service. You can prepare your paperwork yourself, using software such as H&R Block Tax Cut or TurboTax. Expatriate tax returns should be sent to a different address than domestic ones! If no payment is due, file with the IRS in Austin, TX 73301-0215 USA. If you do owe a payment, file with IRS, P.O. Box 1303, Charlotte, NC 28201-1303, USA.
- Electronically filing. This is the fastest method: you can be aware it was processed within a few days, and if you use direct deposit as well, you can get your tax refund in under 10 days. With an income of less than $58,000, you can file for free with the IRS. If you use a tax professional, many will also provide this as a free additional service.
Information about e-filing, as well as all of the IRS forms are available online through the IRS website.
But what about state taxes?
Well, if you move out of the country, you're most likely no longer a resident of your state. Therefore you are not subject to state tax unless you earn money in that state. State income includes any salary or income earned in the state, as well as any income from interest in a partnership or corporation with operations in the state. For example, if you rent out your old home, you will probably have to file a state income tax return.
Of course, state regulations and requirements may vary. While these claims are usually unsuccessful, a few states (such as California) try to claim you may still want to come back although currently you are out of the country. You'll probably want to check out your state's income tax website or ask a tax return professional.
So how difficult is this going to be?
It's true that expatriate tax returns can get more complicated than regular returns. They can get especially complex if you have significant foreign income taxes.
Fortunately, there are a few resources to make your life a little easier. For one, see if you can take advantage of the IRS "EZ" forms. If you earn less than $91,500 (that's salary and bonuses), you may be able to use Form 2555-EZ. This relatively simple 2-page form asks where you live and work, as well as your visas and travel, and must be filed with Form 1040. All together, this isn't more work than filing the 1040-A.
Finally, these articles aim to make things painless as possible for you by providing clear, useful information to help you navigate through the U.S. Federal tax return process.
I.J. Zemelman, EA is the founder of Taxes for Expats