US Taxes Abroad (update for tax year 2023) information : taxation (2024)

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You're a US citizen or a green card holder and you live somewhere outside the USA (i.e. in a "foreign" country).

You may have US tax filing obligations if you have personal income such as wages, salary, commissions, tips, consultancy fees, pension fund, alimony, US and/or foreign social security, interest, dividends, capital gains, rental property, farm income, royalties, gambling winnings, inheritance or payment in kind in the US or abroad.

You may have US tax filing obligations even if you haven't ever lived in the USA or left several years ago and all your income is from "foreign" sources.

You may have US tax filing obligations even if some or all of your income was already taxed at source or is going to be taxed by a foreign country.

You may have US tax filing obligations even if you aren't earning any money but are married to someone who did have income.

Basically, you have to file IRS Form 1040 and relevant schedules for the previous year if your income was above a certain threshold. These thresholds are the same as for US residents. For tax year 2022 (filing in 2023) the thresholds (total yearly income) are:
Under 65 65 or older

You are single (unmarried) $13,850 $15,700

You are married filing jointly $27,700 $30,700 (both over 65)

You are married filing separately $5 $5

You are filing as "Head of household" $20,800 $22,650

Qualifying surviving spouse $27,700 $29,200

These filing thresholds correspond to the STANDARD DEDUCTION for each filing category. The PERSONAL EXEMPTION amount was set to zero under the Tax Cuts and Jobs Act passed December 22, 2017. When taxpayers choose to file as "married filing separately" they must both claim the standard deduction when filing or they must both itemize their deductions. One spouse is prohibited from claiming the standard deduction if the other spouse is itemizing. If both spouses itemize, there is no standard deduction and no personal exemption. That's why the filing threshold is $5 for this category--taxes start at $5 of income.

Filing the 1040 is generally due each year on April 15th with an automatic extension to June 15th for Americans residing abroad, but if any taxes are due, interest is calculated starting April 15th up to payment date. You can request an additional extension by filing Form 4868.

How does living abroad mitigate your US tax?

If you qualify as an American citizen residing abroad (basically having lived at least one year abroad), there are two methods by which you can reduce your US tax by a substantial amount. These are the "Foreign Earned Income Exclusion (FEIE)" and the "Foreign Tax Credit (FTC)." You can use either or both of these methods as will be explained below.

However, neither of these methods excuses you from filing if your income was above the filing threshold.

The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) allows you to exclude a certain amount of your FOREIGN EARNED income from US tax. For tax year 2023 (filing in 2024) the exclusion amount is $120,000. What this means is that if, for example, you earned $130,000 in 2023, you can subtract $120,000 from that leaving $10,000 as taxable by the US. But beware: this $10,000 is taxable at tax rates applying to $130,000 (known as the "stacking rule"). The exclusion applies only to foreign earned income. Other income, such as pensions, interest, dividends, capital gains, US-sourced income, etc., cannot be excluded with the FEIE. You are liable for full US tax on these types of income.

Here's a simple example. Suppose you live in France and you earned €120,150 ($130,000 according to the current exchange rate) from your French employer. You are married filing jointly, have two children and you use the standard deduction ($27,700) and child tax credit ($4,000 for two children).

The US tax on this income is calculated as follows:

US tax on $130,000 is $9,121

US tax on $120,000 (amount excluded) would be $6,921

Net US tax payable
($9,121 - $6,921) = $2200

While this is only an approximate calculation, it gives you an idea of how the system works.

The other method for reducing your US tax bill is the foreign tax credit, using IRS Form 1116. If your income was taxed by a foreign country, you can subtract that tax from your US tax, in most cases substantially reducing your US tax bill. But be careful: you cannot claim a foreign tax credit for foreign taxes on income excluded on Form 2555. In other words, you can only claim a foreign tax credit for foreign taxes on the same income that the US is taxing. The fraction of your foreign taxes that can be taken as a tax credit is determined by the ratio of non-excluded income to total income. Here's an example, using the same figures as above.

French income taxe on €120,150 ($130,000) is €15,494 = $16,765

Fraction of foreign taxes that can be taken as credit

($130,000 - $120,000)
------------------------------ = 0.077
$130,000

Net French tax that can be taken as credit
(0.077 x $16,765) = $1,291

This net French tax can be subtracted from your US tax
($2,200 - $1,291) = $909 which should be paid to the IRS.

In this particular example, you would actually be better off by just using the foreign tax credit alone and not even claiming the FEIE. If you do this, you wouldn't have to pay anything in US taxes (French income tax $16,765 is greater than the US income tax $9,121). In addition, the foreign tax credit can be applied (in some cases) against tax on unearned income as well (pensions, interest, capital gains, etc.) if they are being taxed in the foreign country.

So you see that by judiciously combining the FEIE with the foreign tax credit or by applying only the foreign tax credit you can substantially reduce or even bring your US tax bill down to zero. Again, this is only an approximate calculation to serve as an example of how the system works.

Reminder: you MUST file your US tax forms even if your calculated tax bill is zero when applying the FEIE and/or the foreign tax credit.

Note that if your American-citizen spouse also has foreign income, he/she can also apply the FEIE up to a maximum of $120,000 on his/her own earnings, but you cannot apply your spouse's exclusion to your own income.

By filling out forms 2555 and 1116 correctly you will be walked through these calculations.

To summarize: If your foreign earned income was less than $120,000; use the FEIE to reduce your US tax on this income to zero. However, if your foreign earned income was more than $120,000 or you had unearned income of any amount, explore the possibility of using your foreign taxes as credit against any US tax which may be due.

Be aware that if you have been claiming the FEIE in previous years using Form 2555 and you decide this year to use only the foreign tax credit you cannot go back to the FEIE for the next six years unless you receive permission from the IRS.

In some cases, you can exclude qualified housing expenses from your taxable income. This exclusion can be calculated using Part VI on Form 2555.

There are many other aspects to be considered when figuring your US taxes. Among these are the "Alternative Minimum Tax" (AMT); handling of unearned (passive) income such as interest and capital gains; the foreign housing exclusion for your lodging; earnings of a non-US spouse; business expenses; the possibility of itemizing deductions instead of applying the standard deduction; state taxes in certain US states where you formerly resided; etc., etc., but they go beyond the simple explanation that this article is intended to be. Self-employment taxes (for Social Security and Medicare) can apply if your net annual earnings exceed $400 and you live in a country which doesn't have a social security "totalization" agreement with the US. If you need to consider any of these elements, you would be well advised to consult an international tax expert, a list of which is provided here.

Social Security Number and ITIN

All tax returns must have either a Social Security Number (for a US citizen or resident) or an ITIN (Individual Tax Identification Number).
While SSN numbers are valid for life, ITINs for a nonresident alien spouse or dependent used on a prior year income tax return may require renewal. For more information go to www.irs.gov/individuals/individual-taxpayer-identification-number .

Passport revocation

The Internal Revenue Service is required to notify the State Department of taxpayers "certified" as owing a seriously delinquent tax debt. The State Department is generally prohibited from issuing or renewing a passport to a taxpayer with a seriously delinquent tax debt (over $62,000 in 2024). For more information see here.

The Affordable Care Act

Previously, taxpayers were obligated to obtain minimum essential health insurance coverage for themselves and their dependents, qualify for a health coverage exemption or make a "shared responsibility" payment with their federal income tax return for the months without coverage or exemption through 31 December 2018. Under the Tax Cuts and Jobs Act, passed December 22, 2017, the amount of the individual shared responsibility payment was reduced to zero for months beginning after December 31, 2018. Beginning in tax year 2019 and until further notice, Form 1040 and Form 1040-SR will not have the "full-year health care coverage or exempt" box. Form 8965, "Health Coverage Exemptions," is no longer being used. You do not need to make a "shared responsibility" payment or file Form 8965 with your tax return.


Foreign Bank Accounts

The US government does not tax wealth as such. However, the IRS still wants to know about money in foreign bank accounts especially if it produced any income such as interest and/or capital gains. Unfortunately, due to recent legislation, there are two different reporting requirements for foreign bank accounts. These are the "FBAR" and "FATCA" respectively, one or both of which may apply to you.

The FBAR (Foreign Bank Account Report) has been around since 1972 and should be filed if your aggregate foreign holdings are worth $10,000 or more at any time during the tax year, or if you have signature authority over one or more foreign accounts, for example if you are the treasurer of an association or work in the accounting department of your employer and sign for payments. Starting in 2014 and in succeeding years, the FBAR must be filed electronically as FinCen Form 114 with the Department of the Treasury. It should be filed by April 15th each year, (at the same time but separate from Form 1040) with an automatic extension to October 15th if living abroad.

Parallel to that is FATCA (Foreign Account Tax Compliance Act) Form 8938 which should be filed with your Form 1040 if your foreign assets exceed one of the following limits:

Unmarried or married filing separately living in the US: you should file Form 8938 if your aggregate foreign holdings are worth $50,000 or more on the last day of the tax year or were more than $75,000 at any time during the tax year;
Married filing jointly and living in the US: you should file Form 8938 if your foreign holdings are worth $100,000 or more on the last day of the tax year or were more than $150,000 at any time during the tax year;
Unmarried or married filing separately and living abroad: you should file Form 8938 if your foreign holdings are worth $200,000 or more on the last day of the tax year or were more than $300,000 at any time during the tax year;
Married filing jointly and living abroad: you should file Form 8938 if your foreign holdings are worth $400,000 or more on the last day of the tax year or were more than $600,000 at any time during the tax year. For more information, see here.

Starting January 1, 2015, foreign banks, under FATCA, have been reporting directly or indirectly to the IRS, so it is especially important that you file Form 8938 correctly.

If your aggregate foreign bank account holdings exceed the threshold for one or both of these reporting requirements (FBAR and/or FATCA) you would be well advised to consult an international tax expert.

ACA has a Directory of international tax advisers.

It is important that you remain current in your US tax filing obligations. Under The Foriegn Account Tax Compliance ACt (FATCA), foreign banks are required to report directly or indirectly to the IRS information on all accounts held by US persons (thresholds apply). If the IRS discovers that you have an undeclared foreign bank account you may be subject to steep penalties and back taxes.

This ACA webpage was updated January 25th, 2024.

US Taxes Abroad (update for tax year 2023) information : taxation (2024)

FAQs

US Taxes Abroad (update for tax year 2023) information : taxation? ›

For tax year 2023 (filing in 2024) the exclusion amount is $120,000. What this means is that if, for example, you earned $130,000 in 2023, you can subtract $120,000 from that leaving $10,000 as taxable by the US. But beware: this $10,000 is taxable at tax rates applying to $130,000 (known as the "stacking rule").

What is the overseas tax exemption for 2023? ›

The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2023, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $120,000 per qualifying person. For tax year 2024, the maximum exclusion is $126,500 per person.

How to declare income from abroad? ›

If you earned foreign income abroad, you report it to the U.S. on IRS Form 1040. In addition, you may also have to file a few other international tax forms relating to foreign earnings, like your FBAR (FinCEN Form 114) and FATCA Form 8938.

What is the IRS publication on foreign income? ›

Publication 514 discusses the credit or itemized deduction you may be able to take if you paid or accrued foreign taxes to a foreign country on foreign source income and you are subject to U.S. tax on that same income. Taken as a deduction, foreign income taxes reduce your U.S. taxable income.

Do I have to file taxes in the US if I live abroad? ›

Do I still need to file a U.S. tax return? Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits.

How much overseas income is tax free? ›

However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020, $108,700 for 2021, $112,000 for 2022, and $120,000 for 2023). In addition, you can exclude or deduct certain foreign housing amounts.

What foreign income is taxable in the US? ›

If you are a U.S. citizen or a resident alien, your income is subject to U.S. income tax, including any foreign income, or any income that is earned outside of the U.S. It does not matter if you reside inside or outside of the U.S. when you earn this income.

How do I report foreign income to the US tax return? ›

You must attach Form 2555, Foreign Earned Income, to your Form 1040 or 1040X to claim the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction. Do not submit Form 2555 by itself.

How to avoid double taxation on foreign income? ›

Expats can use the Foreign Earned Income Exclusion (FEIE) to exclude a certain amount of foreign income from US taxation. The maximum exclusion amount changes each year. For the 2023 tax year, the FEIE exclusion limit is $120,000 and will increase to $126,500 for the 2024 tax year.

Should you declare foreign income? ›

In your income tax return, you need to declare all worldwide income unless a specific exemption applies. Keep in mind, however, that even some exempt income still needs to be reported, even if it won't necessarily be taxed.

Do I have to report foreign income to the IRS? ›

Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts.

How does the IRS track foreign accounts? ›

Through FATCA, the IRS receives account numbers, balances, names, addresses, and identification numbers of account holders. Americans with foreign accounts must also submit Form 8938 to the IRS in addition to the largely redundant FBAR form.

Do US citizens have to pay taxes on foreign property? ›

Wherever you live, buying and selling real estate can have tax implications. If you are an American, you will owe the same taxes on foreign real estate transactions as on domestic real estate. You will also need to correctly convert foreign currency transactions to U.S. dollars.

What happens if U.S. citizens don't file taxes while living abroad? ›

As a US citizen living abroad, it's important to understand your filing obligations to remain compliant with the IRS requirements and avoid complications. Failing to file a tax return can lead to penalties and legal repercussions, even if you're living outside the US.

Do U.S. citizens living abroad pay double taxes? ›

The US is one of the few countries that taxes its citizens on their worldwide income, regardless of where they live or earn their income. This means that American expats are potentially subject to double taxation – once by the country where they earn their income, and again by the United States.

What happens if you don't file US taxes abroad? ›

The US expat tax penalties to file an FBAR are more severe and the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50% of the total balance of the foreign accounts. Expat non-willful violations that are not due to reasonable cause are subject to a penalty of up to $10,000.

What is the foreign earned income limit for 2023? ›

The FEIE limit is adjusted for inflation every year. The 2023 FEIE limit is $120,000, up from $112,000 in 2022, which is the largest increase in recent years.

What is the tax exemption for US citizens living abroad? ›

Foreign Earned Income Exclusion (FEIE)

If you claim the Foreign Earned Income Exclusion by filing IRS Form 2555, then you don't have to pay tax on your first $112,000 of foreign income for the 2022 tax year.

What is the 330 days foreign exclusion rule? ›

Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period including some part of the year at issue. You can count days you spent abroad for any reason, so long as your tax home is in a foreign country.

What is the US tax deadline for citizens living abroad 2023? ›

The standard deadline for US residents to file a Federal Tax Return for the 2023 tax year is April 15, 2024. However, this deadline automatically extends two months to June 17, 2024, for US citizens living overseas. (If a deadline falls on a weekend or holiday, it is moved to the next business day.)

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