Tax is a complex issue for US expats moving overseas – here’s why
Tom LR Griffiths is a tax advisor and consultant, specialising in US expatriate tax matters
Tom LR Griffiths
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What tax changes can US expats expect when moving abroad?

US Tax

What tax changes can US expats expect when moving abroad?

For US citizens moving or already living overseas, tax can be a confusing issue. Given that the US is an outlier in taxing its citizens – in that the system is based on citizenship rather than residence – this isn’t surprising.

And, with the Biden administration announcing changes, this becomes even more confusing. Any US citizen starting a new life abroad must be aware of their filing obligations in 2022.

US expats must ensure they understand the complexities of tax

Filing taxes from overseas to the US is complex as there are various exemption and credit claims to file too. These can reduce, and in some cases, entirely eliminate the bill. Furthermore, there is an obligation to report their assets, bank and investment accounts and any businesses registered abroad.

To combat this confusion, I’ve put together a list of steps US citizens moving abroad need to take to keep their tax filings up to date.

Who needs to file US taxes in 2022?

The simple answer is every US citizen and every green card holder who:

  • Earned more than $12,550 in 2021. Earnings must include all income in all currencies.
  • Earned $400 ore more of income from self-employment.
  • Earned just $5 of any form of income if they are married to someone from overseas but file separately.
  • Accidental Americans – these are people who were either born in the US while their parents visited temporarily.

 

US expats who are filing their taxes from overseas must convert earned income into US dollars. They also get a different filing deadline to US citizens living at home, with an automatic extension to 15 June. This can also be extended to 17 October at special request.

Regardless of when the taxes are filed and which deadline is hit, the tax payment must be paid by 18 April of the next financial year.

Reducing the US tax bill for citizens living overseas

While every US citizen living overseas has to file taxes based on their worldwide income, the majority will be able to lower or wipe out their tax bill entirely through various legal methods.

The IRS ensures that US expats can make claims at the same time as filing their taxes in order to reduce their bill.

What about tax treaties?

Some US expats may assume or believe there is some kind of tax treaty in place between their new country of residence and the US, which means they don’t have to pay tax in both locations.

However, US tax treaties include the ‘Saving Clause’, which essentially means that the US can still tax its citizens. There are some exceptions with some treaties, such as for researchers, teachers or students. To benefit from a tax treaty, the person should file Form 8833 when they file their tax.

US Foreign Tax Credit – file IRS Form 1116

This is the route that most US citizens take to bring their tax down. The US Foreign Tax Credit allows US citizens living abroad who are paying taxes in that country to claim US tax credits to that value.

However, this only applies to overseas taxes on the linked income, and not from US based investments, assets, pension or rents.

To claim this US expats need to file IRS Form 1116 with their annual tax return. It’s often the best option for those who pay a higher rate overseas than the US tax rate. Claiming this can therefore often wipe out their US tax bill entirely. They can also use left over tax credits to carry forward the following year.

Even if US citizens know they will end up owing no US tax while they’re living overseas they still have to file the return.

US Foreign Earned Income Exclusion – file IRS Form 2555 or 2555-EZ

This allows US expats to exclude a set amount of their earned income from tax. For tax year 2021 the threshold is $108,700 but it increases every year according to inflation. It applies whether the person is paying taxes overseas or not.

The Foreign Earned Income Exclusion only applies to earned income:

  • Salary
  • Income from self-employment
  • Income from commissions

 

It doesn’t apply to what is considered passive income, such as dividends, interest, pensions or rent.

Regardless of the source of the earned income, people must meet one of two IRS tests to determine eligibility for this exclusion. They are:

  1. Bona Fide Residence Test – to prove they were a permanent resident overseas during the tax year in question with a visa or proof or permanent residence.
  2. Physical Presence Test – to prove they lived outside of the US for at least 330 days of the tax year in question.

 

Claiming tax credits in specific circumstances

There should be no US citizen paying a more income tax than the highest of the two (that is the rate in the country where they’re living and working and the US).

On many occasions, US expats end up owing very little or nothing to the IRS, but it is still a legal requirement to file. There are some instances when neither of these exclusions work, such as if the only income is from a US rented property, for example.

In cases like these, it’s likely that the person will end up paying US taxes and then claim credits in their country of residence if possible.

Child Tax Credit – File Form 8812


There are many other considerations for US expats when filing taxes, such as the Child Tax Credit. If they have kids and are living abroad then they may be able to claim this, which for 2021 means a tax credit of $3,000 per child.

If they have already lowered their US tax bill through other credits, they can claim a refundable Child Tax Credit in the form of a payment. The children must be US citizens and hold social security numbers to qualify for this.

This blog contains the basics of tax requirements for US citizens living abroad, but there are many other considerations. These include whether they also must file:

  • Foreign Bank Account Report (FBAR)
  • Foreign Account Tax Compliance Act (FATCA) via Form 8938
  • State Taxes
  • Streamlined Procedure, which allows expats to catch up on three years of unfiled taxes without penalty
  • US Social Security taxes
  • Foreign registered businesses via Form 8832 and 8858.

 

Work with a specialist in US taxes to remain compliant

Filing US taxes in 2022 is absolutely more complex than filing from the US. The IRS can – and does – enforce global tax filing. Should they consider that a US citizen owes more than $50,000 in US tax, they can remove US passports.

This is why it’s so important to be compliant and on top of the complexity of filing US taxes while living and working abroad. And while, for those with incredibly straightforward circumstances, it’s possible to remain compliant by self-filing tax returns, I absolutely advise US expats living overseas to work with a US expat tax specialist to keep on top of any changes.

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