3 Important US Tax Considerations for American Expats

The tax system is well organized in the US. As an American expat, you may not need to worry about filing your US taxes; you will get an automatic suspension in a foreign country. As a foreigner, you will get more time to file your tax returns in your home country, but keep in mind that you do not have more time to pay. So, while living in a foreign country you should consider your tax return in your home country. 

There are 3 key aspects you should know about filing US taxes as an American expat. 

American Expats 

American expats are US citizens, and US Green Card holders are also considered as US residents. US citizens are accountable for income taxes and they have to file tax returns in their home country, even when living in a foreign country. 

Sorry to non-US expats. I am American so I know the information only for American expats. Whatever country you belong to, please make sure to know your home country's tax requirements. 

Here I want to mention that I am not a finance or tax professional. The information I shared in this post is common, and you should not have relied on it. For complete information, please talk to a professional. Through this post, I am just trying to get you to be familiar with taxes and be ready for them. 

1) When to File and when to Pay Tax?

When you are living out of your home country, you get an automatic 2-month extra time to file your tax returns. So you don’t have to worry about filing and paying taxes until June 15. For this extension lead, you don’t have to do anything, but living and having a job outside your country on the April tax date, and filing a statement to your return. 

If you be indebted tax, you may have to pay interest on that tax, it will be counted from the April tax due date. Please consult a tax advisor for complete details. 

2) Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC)

There are two ways for reporting, the money you earned outside your home country and calculating how much tax you have to pay on it. These methods are used to ensure that you don’t have to pay taxes two times, once in China and once in your home country. However, the Foreign Earned Income Exclusion is the most common choice, and the second way, Foreign Tax Credit, is also useful. It may save you from extra charges.

Excluding Foreign earned Income

The Foreign Earned Income Exclusion allows you to eliminate a certain amount of income from federal taxes, so you don’t have to worry about US income tax on your foreign earned income. To get this exclusion, you have to fulfill a few requirements: 

• You must have a job in a foreign company or have foreign earned income; the salary you earned for offering your service outside your country will be determined.
• Your tax home should be in an abroad country where you live and work.
• You have to qualify as a resident in the country where you are living

If the foreign earned income is exceeding the FEIE limit, you have to pay taxes on your income, and the same tax rule applies if you don’t exempt any income from federal taxes. However, if your earned income is below the limit, you don’t have to pay income taxes on it, but you may have to pay taxes on other income like the US earned income or investment income. Still, you have to file a tax return in your current country.

Excluding income from federal tax returns doesn’t mean that your income taxes in the US are also excluded in the same way. The FEIE option is not allowed in all states. 

One thing you should keep in your mind is that if you eliminate all your foreign earned income, you won’t make any IRA or Roth IRA contribution. These contributions need real earned foreign income. There could be other tax conditions, for instance, tax credits, where having a non-excluded income is also an advantage. For complete info consult your tax advisor. 

Taking credit for Income Tax you paid in a foreign country

The second option Foreign Tax Credit FTC allows you to take credit for the tax you paid in a foreign country. So if you have paid income tax on the income you earned in China, you can use that Chinese tax amount to balance your US tax load. 

You can apply the FTC only on non-excluded foreign earned income, so if you have used the FEIE before, you can’t use a tax credit against the income you have let off. Double-dipping is not allowed. 

If your abroad income is higher than the FEIE limit, you can apply the FTC for foreign income tax you have paid on the non-excluded earnings. The IRS tax publications help to determine the accurate tax amount.

But remember that you can apply the FEIE per person only. Couples can't combine their FEIE amounts and they can’t use them for higher and mutual income.

How do you figure out how much income tax you paid in China so that you can apply for the FTC? At the end of the year, an official tax document is issued and provided to you by your company. The document shows all the taxes you have paid in China.

Which one to choose FEIE or FTC?

Both are a good option, but the question is which one you should choose.

Many people think the FEIE is a better option because it seems so simple. Just eliminate the income you don't need to pay taxes. To find the best one, you have to use both situations. You can consult your tax advisor or do it yourself. 

I use TurboTax for filing my tax returns. You can buy it online and use it on your computer. You have to know the US ex-pat taxes and be able to leave the guided method and get straight into the forms to do your foreign taxes yourself. 

Tax software also helps to e-file, so you don’t need to deal with the bother of mailing. But some states don't allow e-file. 

3) Bona Fide Residence or Physical Presence test

These two methods can be used to figure out if you are qualifying for the FEIE. The Bona Fide Residence test is much more useful than the Physical Presence Test. If you get examined, it can be much difficult to verify to the IRS that you really meet the requirements under the Bona Fide Residence Test. So, the second option Physical Presence test is a better way to test. 

Bona Fide Residence Test

For this test, you have to prove that you have moved your residence to an abroad country where you are paying tax. Any connection that you continue to your old residences like membership, family visit, and property maintenance, may be required against your due.  

You must have to prove your residence in the US if the IRS questions you. However, the IRS recommends using the Physical Presence test to avoid any obscurity. 

Physical Presence Test

For this test, you have to keep a good record of all days you spent outside of the country. The IRS needs your passport with proof of your comings and outgoings travel, so keep your old passport carefully, it is important to document your travel. 

You must have a good track of 330 full days spent within a year in an abroad country. These days have to be full; the day of coming and going out will not count. All states count that number of days. You can count any year period that starts or ends in a foreign country within the tax year. 

You have to choose a 12 month period where you spent a lot of days in abroad countries. These spending days are important because they also impact the foreign earned income you want to eliminate. The FEIE limit is calculated based on that number of days. 

Other important reporting requirements – Don’t skip this!

The 3 aspects above are important for American ex-pats working abroad. But there are more important requirements:

There are certain reporting requirements for foreign financial assets FATCA and foreign bank account FBAR that don’t directly apply but that you need to be familiar with. Flop to achieve these reporting requirements can lead to high fines. So, you should learn about them. 

If you use tax software TurboTax to file your tax returns, it will get you through those reporting requirements and organize the required forms you have to file. But keep in mind that ex-pat taxes are more difficult than the TurboTax showed method. Sometimes you have to check into certain topics and get into the tax forms directly.

No matter if you Do yourself or have someone do it for you – Just get it done!

Thanks for being with me through this boring topic. I know paying US taxes as a foreigner is one of the experiences you were considering when moving outside your country. 

For more Tax Info and Resources

For more info and resources about taxes, you can check into the IRS website. The IRS has local offices in many cities around the world. IRS office in Beijing has lead great tax workshops all over in China. But unfortunately, it was closed in 2014. However, you can get tax info from the embassy’s US Citizen Service website. For further info about FEIE and other tax requirements, you should consult a tax advisor.