Moving Abroad? Everything you need to know about tax filing requirements for American expats

Moving abroad can be at once exhilarating and daunting, irksome and liberating. Between packing up and saying goodbye at home, and organising our new life in another country, it is at best an extremely busy time. It's been said that moving house is one of the most stressful experiences in life, let alone moving to a foreign and often alien country and culture too. One thing that almost always falls off the list during the move though is getting to grips with our new expat tax obligations. 
Tax returns for USA citizens
The US is one of just two countries (the other being the East African minnow of Eritrea) that tax on citizenship rather than just residence, so for US citizens, moving abroad means having to file two sets of annual tax returns, one to the IRS, and another to the government of your new home (assuming that you qualify for residence there). Furthermore, there are several extra filing requirements that the US places on expats alongside their income tax return, as it endeavours to ensure that US citizens declare all their foreign income and assets as well as their US ones.
So US citizens and green card holders moving abroad have to file in both the US and their new country of residence. The first step is of course to find out about the filing dates and obligations for both, to ensure that you're aware of any deadlines. You will also have to register with the tax authority in your new country, so it's worth finding out how to do so early on. If you have a job waiting for you on arrival, your employer should be able to help out with this.
Now for some good news: the US has double taxation agreements with lots of countries, and has various other provisions in place as well to prevent the same income being taxed twice. It's worth noting that the penalties for failing to file in the US are harsh though, so despite probably not paying any tax to the US once you're living abroad, and assuming that you're paying it somewhere else, don't for a moment think that not owing any tax is a valid reason not to file an annual return.
For those expats who have been living abroad for a while but haven't filed, don't fear: the IRS has a program called the Streamlined Procedure that will allow you to get up to date with your filing without facing any penalties. Introduced in mid 2014, the Streamlined Procedure simply requires that the last 3 years' of returns be filed along with the last 6 years of FBARs (more about which shortly), that any taxes due are paid, and that a declaration be filed stating that past non-compliance wasn't wilful avoidance. And that's it. No penalties, and no more sleepless nights.

For those just moving abroad though, here are the US filing obligations:

  • Any taxes due must be paid by April 15th, the same as in the US, however the filing date for expats is June 15th, with an extension available until October 15th which you can request online.
  • The Foreign Account Tax Compliant Act (FATCA) meanwhile requires US expats to attach form 8938 to their return declaring any overseas earnings and assets.
  • Furthermore, US expats who have at least ten thousand dollars in total in bank accounts outside the US at any time during the tax year must also submit an FBAR (Foreign Bank Account Report) declaring their overseas bank accounts. In practice this is form 114 which from 2016 must be filed online by April 15th, though again an extension will be available until October 15th.
Now that you know the US filing dates and requirements, find out what if any tax treaties exist between the US and your new country of residence to prevent you paying tax on the same income twice. Typically, you pay tax on income in the country where it's earned. Again, an online search ought to fairly quickly shed some light on this.
If your new country of residence doesn't have a double taxation treaty in place with the US, there are several other provisions to prevent you paying tax twice. These include the Foreign Earned Income Exclusion, which relieves US expats from paying tax on the first $100,800 (in 2015) of income earned abroad. The exclusion can be claimed on Form 2555, which should be filed with your return. If you are married to a US citizen or green card holder who also has foreign income, you can both claim up to the full amount. 
If you earn more than the maximum Foreign Earned Income Exclusion allowance, the Foreign Tax Credit allows you to claim as a credit against your US liability a dollar for every dollar of income tax you've paid to the government in your country of residence. 
Finally, the Foreign Housing Exclusion allows you to claim housing expenses including rent, utility bills, insurance, and parking as tax deductible, normally up to the value of 30% of the Foreign Earned Income Exclusion.
With the help of tax treaties and/or the various exclusions and allowances available, most US expats won't end up paying the IRS a penny, although please do remember that you still have to file.
For your tax return in your new country of residence, if your situation is anything less than totally straightforward, seek a recommendation for a good local accountant from someone that you trust. For filing dates and basic requirements, again a quick search online ought to shed some light.
For your US return, the best option is to consider a firm that specialises in US expat tax returns, as even good accountants in the US, if they aren't dealing with expat considerations day in day out, may not be able minimise your liability.
Contributed by H Lesser of Bright!Tax, a specialist online US expat tax return preparer with clients in over 100 countries.

Article written October 2015

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