Do I need to file my US federal taxes as an expat?

US expats are generally subject to the same tax rules as US residents. This is due to the fact that the US tax system requires all US citizens to file and report their worldwide income, no matter where they live.

So when you are an expat living and working abroad you likely need to file your US taxes. A lot of Americans abroad don’t realize this, but don’t worry – it’s easy to get caught up.

The good news is that you need to file and report your worldwide income in the US does not necessarily mean that you owe US taxes. In fact, a lot of US expats end up not paying any US taxes. We will explain this in more detail further below.

Who needs to file a US expat tax return?

As US expats are subject to the same tax rules as US residents, the same filing thresholds apply. For tax year 2020, US expats are required to file a US federal tax return if they meet the following thresholds:

Filing statusUnder 6565 of older
Single$12,000$13,600
Married filed jointly$24,000$25,300 (1 spouse 65 or older) or 26,600 (both spouses 65 or older)
Married filed seperately$5$5
Head of household$18,000$19,600
Qualifying widow$24,000$25,300

Also, regardless of the above filing thresholds, if you have self-employment income of $400 or more, you need to file your US federal tax return. This includes individuals with their own business, as well as freelancers, and independent contractors. Are you self-employed or working as a digital nomad? Read more!

Will I actually owe taxes as an expat?

The good news is that although you need to file your US federal tax return reporting your worldwide income, this does not mean that you owe US taxes. In fact, a lot of US expats end up not paying any US taxes. We will explain this in more detail further below.

When do I need to file my US expat tax return?

For 2020, the regular due date for filing a US federal tax return is April 15th. Generally, expats have an automatic extension to June 15th.

Additionally, the IRS will grant an automatic extension to October 15th as long as the extension has been filed by your regular tax return due date. Expatfile will offer a free extension for TY2020.

Am I taxed twice by the host country and the US?

As an expat you may also have to pay taxes to the foreign country you live in. Expats also need to report the same foreign income in the US, but it would be unfair if the same income is taxed by both the foreign country you live in, as well as in the US.

In order to prevent this, and provide relief to US expats, the US tax code allows expats two methods to prevent their income from being taxed twice. These methods are the Foreign Tax Credit, and the Foreign Earned Income Exclusion. These will be further explained in this article.

The Foreign Tax Credit (“FTC”) and the Foreign Earned Income Exclusion (“FEIE”)

US expats can claim either the FTC, or the FEIE, or both! This can reduce or eliminate an expat’s US tax bill.

Foreign Tax Credit

If you paid any taxes to a foreign country during the year, then you are likely able to claim the foreign tax credit by filing Form 1116. By claiming the foreign tax credit, you can offset your US federal taxes dollar for dollar based on the amount of foreign taxes you paid!

Here’s a simplified example of how it works:

  • You’re filing your 2020 US federal tax return and your filing status is “single”.
  • You earned foreign wages of $120,000 while living and working in the Netherlands
  • Let’s assume you would owe $40,000 in US federal taxes on this income.
  • On your foreign wages, you actually paid $50,000 in Dutch taxes.

Since you paid $50,000 in Dutch taxes, you can use up to $40,000 of this as a a foreign tax credit, bringing your US federal tax bill from $40,000 down to $0. In addition, the $10,000 in excess Dutch taxes can be carried forward to the next year, offsetting any US federal taxes owed on foreign income in the next year!

Sometimes claiming the FTC may not be as beneficial as claiming the FEIE, but in most cases we advocate for claimng the FTC first!

For even more details on the FTC, click here.

Foreign Earned Income Exclusion

The FEIE allows expats to exclude all or part of their foreign wages and foreign self-employment income from being subject to US federal tax. You claim the FEIE by filing Form 2555.  This exclusion reduces your US taxable income which eventually results in a lower U.S tax bill, or even no US tax bill for many expats.

The maximum exclusion amount for 2020 is $107,600. This exclusion basically means that the first $107,600 of your foreign income will be excluded from your US taxable income. If your foreign income exceeds $107,600, then you would only be subject to US federal tax on the amount of foreign income which exceeds the FEIE amount of $107,600.

Here’s a simplified example of how it works:

  • You’re filing your 2020 US federal tax return and your filing status is “single”.
  • You earned foreign wages of $120,000 while living and working in Singapore.
  • Let’s assume you would owe $40,000 in US federal taxes on this income.
  • On your foreign wages, you actually paid $20,000 in Singapore taxes.

Of the $130,000 of your foreign wages, you can exclude up to $107,600 from being subject to US federal taxes. This brings your wages subject to tax down to $22,400. The 2020 standard deduction for a taxpayer claiming the “single” filing status is $12,400 (everyone gets this), meaning your taxable income would be $10,000. You would pay US federal taxes on the $10,000, and not the full amount of your foreign wages of $130,000. However, since you paid foreign taxes too, you will still be able to claim a foreign tax credit and reduce your US federal tax bill down to $0.

If you are a married taxpayer, and your spouse is also earning foreign wages, then they will also be able to claim the FEIE as well!

For even more details on the FEIE, click here.

When should I claim the FEIE and when should I claim the FTC?

If you live and work abroad in a country where the foreign tax rate is higher than the US federal tax rate, then you are usually better off by claiming the FTC. Claiming the FTC is a much more simple process than claiming the FEIE, and it also opens you up to other tax breaks in the US like the child tax credit.

Generally, if you live in a country where the foreign tax rate is lower (or zero) than the US federal tax rate, then you are usually better off by claiming the FEIE.

Some benefits of claiming the FTC over the FEIE include:

  • If you claim the FEIE in a given year and you want to switch to FTC in a future year, you may not be able to claim the FEIE for 5 years unless you receive special persmissiom from the IRS to do so.
  • If you paid more foreign taxes than US federal taxes, you can carry forward these as a credit to future years.
  • If you claim the FEIE, you cannot claim the Additional Child Tax Credit (a refundable tax credit of up to $2,000 per child per year). If you claim the FTC, you are allowed to take this credit.

You can also claim the FEIE and the FTC together, subject to certain rules. With expatfile, our expat tax software automatically figures out what’s best suited for you, and ensures you make the right choices as you file your expat tax return, guaranting you the largest and best expat tax breaks available.

How can I file my US expat taxes?

There are several ways to file your US federal tax return as an expat. You can hire a tax professional and pay a lot of fees. You can do it yourself (but you may not want to, or know all the rules and all the forms you need to file!)

You can also use Expatfile, the world’s first intuitive tax software, designed specifically for expats like you! Expatfile takes all the guess work out of expat taxes and will allow you to instantly e-file your expat tax return in a matter of minutes. Check out Expatfile’s features here.

As an expat, do I have other filing obligations?

Yes, you may have to file an FBAR if your foreign bank account(s) exceed a balance of $10,000 at anytime during the year. Click here for more details on the FBAR rules.

Still not sure if you should file your taxes? Read the 8 reasons why you should not forget it.

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