File Taxes as a U.S. Citizen Living Overseas

Citizens of the USA who live overseas need to pay taxes for two countries: the one they live in and back home in America. These people are required to file taxes on foreign income even if they pay taxes In the host country. However, you may qualify for specific foreign earned income exclusions or foreign income tax credits.

We do recommend getting advice from professionals if you have a more complicated tax situation. Still, we also want to educate people about the IRS requirements, so you have a deeper understanding of what your taxpayer is doing on your behalf. 

When Do We Have To File Taxes?

Americans working abroad tend to get a two-month leeway before they have to file their taxes. However, if you need more time, you will have to submit the IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. You should be aware that a delayed extension to file a return does not mean you can delay paying- if you have any due taxes, you will need to meet the deadline to avoid further interest or late fees. 

For expert advice regarding U.S Income Tax Returns Filing contact Expat Tax Online.

Do We Have To Pay Taxes On The Income Earned?

Many citizens living abroad don’t owe taxes to the IRS. This is because the U.S has ‘tax treaties with many foreign countries that help prevent your salary from being taxed twice (from the country you live in and from the U.S).

You will need to remember that even though you might not have to pay U.S taxes because of the treaty, you will still have to file a federal income tax return to report any of your earnings abroad.

Some critical tax breaks for people living abroad to prevent double taxation include:

Foreign Tax Credit

The Foreign Tax Credit is used to decrease your tax liability for money earned in a foreign country. The credit is equivalent to the foreign tax you have paid or the foreign tax credit limit. It is essential for you, as an ex-pat, to learn about the Foreign Tax Credit for American Ex-pats or ask your tax advisor about it. The IRS Form 1116 is used to calculate the Foreign Tax Credit.

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is for American ex-pats who earn less than that specified by the IRS (around $108,700 in 2021). To claim this exclusion, you will need to have an income working at a job or from self-employment, and your employment is indefinite. Moreover, you need to meet specific requirements such as the Bona Fide Residence Test or Physical Presence Test (A US Citizen who has been physically present overseas in a foreign for 330 full days in a row)

If you qualify for the Foreign Earned Income Exclusion, you will need to use IRS Form 2555 to calculate the exclusion while filing your return.

How Do We Report Our Income If It’s In Another Currency?

The IRS needs to know how much money you make in USD. Many ex-pats use the yearly average exchange rate to calculate the amount in dollars, but we advise people to calculate payment based on the exchange rate to get an exact amount for that given day. 

Be sure to discuss your decisions with your tax advisor before solely deciding on something. It is crucial to plan to avoid getting into a tax mess later. Remember, your tax advisor always has your best interests in mind, so ask them questions, write down notes, and avoid paying taxes, as that can be a headache later.

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