U.S. Citizens and Resident Aliens Abroad
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If you are a U.S. citizen or resident alien, your worldwide income is generally subject to U.S. income tax, regardless of where you live, but you are generally allowed the same deductions as citizens and residents living in the United States. One notable exception is that you can no longer deduct foreign property tax as an itemized deduction. You must file a U.S. income tax return each year, unless you don't meet the minimum filing requirements. You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1-December 31).
Your U.S. tax can generally be reduced or eliminated by the:
Foreign earned income exclusion - For tax year 2020, up to $107,600 per qualifying person (i.e., if you are married and both work abroad, you may be able to each exclude up to $107,600 of your foreign earned income), The maximum foreign earned income exclusion is adjusted annually for inflation.
Foreign housing exclusion/deduction (usually only beneficial if renting)
The foreign earned income exclusion may be available if your tax home was in a foreign country, you have foreign earned income, and you meet either the:
Bona fide resident test - You've lived in a foreign country for an entire calendar year, made it your home, and (generally) pay taxes there. There are no specific time restrictions; for instance, it is possible to be away from your foreign residence for months and still meet the test, or
Physical presence test - You were physically present in a foreign country or countries for a full 330 days in a consecutive 12 month period.
Note: In general, you cannot claim a foreign tax credit or foreign earned income exclusion on the portion of your wages generated during business trips to the U.S. Any income earned while working in the U.S. is subject to U.S. tax. Some tax treaties may provide limited exceptions to this rule.
Note: The Internal Revenue Service is providing a waiver
of the time requirements related to the foreign earned income exclusion, if, due
to the COVID-19 emergency, the taxpayer was required to leave:
• The People’s Republic of China (excluding Hong Kong and Macau) on or after December 1, 2019, but on or before July 15, 2020; or
• Another foreign country on or after February 1, 2020, but on or before July 15, 2020;
In this case, the taxpayer may still be able to meet requirements of the bona fide residence or physical presence test for 2019 or 2020 for purposes of determining the foreign earned income exclusion. For more information and examples see Revenue Procedure 2020-27.
Meeting the physical presence test and determining your maximum foreign earned income exclusion
You meet the physical presence test if you are physically present in a foreign country or countries for 330 full days during a period of 12 consecutive months and your tax home was in the foreign country. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and U.S. resident aliens.
If you meet the test for a 12 month period that falls within a calendar year (Jan - Dec), you are eligible for a full exclusion, which is $107,600 for tax year 2020. If you are married and both work, then you each may be able to get a maximum exclusion of $107,600.
If you meet the test for a 12 month period that falls within two calendar years, the maximum exclusion will be prorated. For tax year 2020, you can use a 12 month period in either 2019-2020 or 2020-2021. For example, the period of August 1, 2020 - July 31, 2021 would give you a maximum exclusion of $45,104 for tax year 2020 (153 days / 365 days x $107,600 = $45,104). I always try to calculate the time period that gives you the largest exclusion. If your alternate period includes a date in 2021 that has not yet passed, you may need to file an extension because you cannot file your tax return until you have met the physical presence test.
If you had business trips to the U.S. in 2020 while working for your foreign employer, your exclusion will be reduced by income earned in the U.S. during those trips.
If your foreign earned income was greater than the maximum foreign earned income exclusion, then you may also be able to claim a foreign tax credit and/or a foreign housing exclusion for the excess income.
Sometimes it works out better not to claim the foreign earned income exclusion and just claim a foreign tax credit. However, if you were previously claiming the exclusion and then decided to not do so one year, it is considered a revocation and you may not be able to claim the exclusion for the next five tax years.
Bona fide foreign residency
If you are a bona fide resident of a foreign country, then you do not need to meet the physical presence test. You can have more lengthy trips to the U.S. Your maximum exclusion for 2020 is $107,600.
If you had business trips to the U.S. in 2020 while working for your foreign employer, your exclusion will be reduced by any income earned in the U.S. during those trips.
If your foreign earned income was greater than the maximum foreign earned income exclusion of $107,600 (2020), then you may also be able to claim a foreign tax credit and/or a foreign housing exclusion on the excess income.
Sometimes it works out better to just use the foreign tax credit and not claim the foreign earned income exclusion. However, if you were previously claiming the exclusion and then decide to not do so one year, it is considered a revocation and you may not be able to claim the exclusion for the next five tax years.
If you don't meet the physical presence test or the bona fide resident test
Your only option would be to claim a foreign tax credit based on any foreign income taxes that you paid on your foreign earned income.
If you were working in a foreign country paying an income tax rate that was higher than the rate that would apply in the U.S., then in general, you are likely to receive a full foreign tax credit for those foreign taxes that you paid on your income. If you are working in foreign country paying an income tax rate that is less than the rate that would apply in the U.S., then in general, you would owe the difference in tax to the IRS. If you spent any time working in the U.S. for your foreign employer, then that income is not available for a foreign tax credit, unless there is a treaty provision that changes this.
Regular U.S. tax law generally eliminates double taxation by way of the foreign earned income exclusion and the foreign tax credit. All tax treaties contain a saving clause which preserves the right of the US to tax its citizens and residents as if no tax treaty were in effect. However, there are usually limited exceptions to the saving clause. These exceptions are generally the only treaty benefits available to U.S. citizens that are applicable to U.S. tax. For more information, please see Tax Treaties for Americans Abroad.
Report of Foreign Bank and Financial Accounts (FBAR)
If you are a U.S. citizen, resident, or entity, and the aggregate value of all your foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported, you are required to file an FBAR (FinCEN Form 114). Please complete the tax questionnaire where you can enter your foreign accounts. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System or through authorized tax software. The FBAR is not filed with a federal tax return. It is due on April 15 (in some years a few days later) of each tax year, but an automatic extension may be granted to October 15 (or slightly later some years).
For detailed information on FBAR filing requirements, please see Foreign account and foreign asset reporting.
Statement of Specified Foreign Financial Assets (Form 8938)
As of tax year 2011, you may be required to file Form 8938 as part of your individual tax return if you meet the foreign financial asset threshold. There is some overlap between the FBAR and Form 8938 as they may cover the same foreign financial accounts. See Foreign account and foreign asset reporting.
Generally, you will still be subject to self-employment tax (social security and Medicare taxes) even if you can exclude all of your earned income for income tax purposes. However, if there is a social security (totalization) agreement between the U.S. and the country in which you work, and you are covered by social security there on your self-employment income, you might be exempt from U.S. self-employment tax. Click here for social security agreements. See also Social Security, Medicare and Self Employment Tax.
Can I contribute to a U.S. IRA Retirement Plan?
In order to contribute to an IRA, you must have earned income which is equal to or greater than your contribution. If you exclude your entire income in a tax year, and also make an IRA contribution, you have to pay an excise tax on that contribution, and the tax will be assessed again in each future tax year until the IRA contribution has been withdrawn. A way around this is to choose a 12-month period under the physical presence test that will not give you a full exclusion of your income, and therefore leave you with enough earned income to meet the requirements to contribute to an IRA. Also, any days worked in the U.S. on your foreign assignment are not excludable, and so the income generated on those days may be enough to allow you to contribute to the IRA. This is something I can figure out for you when I prepare your return.
Should I file jointly with my foreign spouse?
If you are married to a nonresident spouse, you can either file as (1) married filing separately, (2) head of household (if you qualify), or (3) married filing jointly. To file as married filing jointly, you must elect to treat your spouse as a U.S. resident. Keep in mind that he or she will have the same filing requirements of a U.S. resident alien (reporting worldwide income, foreign bank accounts, etc.). He or she will need either a SSN or an ITIN. In subsequent tax years, you and your spouse will have to continue to file a married filing joint tax return, or two married filing separately tax returns, until the election is ended or suspended. I will let you know if I think this election will benefit you.
Reporting Foreign Unearned Income
As a U.S. citizen or resident alien, you are taxed on worldwide income. In addition to reporting earned income (such as from wages), you are also taxed on U.S. and foreign unearned income. A foreign tax credit can offset some or all of the foreign taxes you paid on the foreign income.
Green Card Holders
you are a green card holder, these links may be helpful:
Maintaining permanent residence
International travel as a permanent resident
I-407, Record of Abandonment of Lawful Permanent Resident Status
IRS, Expatriation Tax
Expatriate Tax Deadlines
April 15 - Tax payment deadline. After this date, interest will be assessed on any tax due. FBAR (Foreign Bank and Financial Account Reporting) is due.
June 15 - Tax filing deadline. If you cannot file by then, an extension can be filed to extend the filing deadline to October 15. Penalties can be assessed after this date on any tax due.
These deadlines are sometimes extended one to four days. This is always the case if the 15th is on a weekend, when the next Monday will be the deadline. Holidays can also sometimes bump the deadline forward.
Federal Tax Withholding
If you are a U.S. citizen and your employer is withholding federal tax while you are working abroad, you can submit Form 673 to your employer if you expect to meet the bona fide residence test or physical presence test.