Expat tax: how do US citizens abroad pay tax?
This article takes a deep dive into expat taxes and how US citizens and resident aliens abroad must navigate their US tax returns.
Summary
US citizens and resident aliens abroad must still file their US tax returns.
The US is one of only two countries in the world to base taxes on citizenship.
There are tax exclusions and credits available to help expats avoid being taxed twice.
If you live outside the US, a financial advisor is best placed to help you navigate your taxes and develop a strategy to reduce your tax burden.
What is expat tax?
Expat tax commonly refers to the tax US citizens living abroad have to pay the US government.
The US is one of only two countries in the world – the other being Eritrea – that taxes based on citizenship, not place of residency.
That means if you are a US citizen, you are legally obligated to pay taxes to the US government.
Resident aliens abroad, including green card holders, must also comply with these rules.
Resident aliens abroad are foreign-born US residents who are not citizens. They are also known as a permanent resident, lawful permanent resident or more commonly, green card holders.
Does a US citizen abroad pay tax?
Yes, US citizens abroad must file a tax return if they make over the general income threshold.
US citizens abroad are subject to tax on worldwide income from all sources and must report all taxable income and pay taxes according to the Internal Revenue Code.
For the 2023 tax year, the threshold is as follows:
| Filing Status | Gross income exceeds: |
|---|---|
| Single (under 65) | $13,850 |
| Single (65 or older) | $15,700 |
| Married filing jointly (both spouses under 65) | $27,700 |
| Married filing jointly (both spouses 65 or older) | $29,200 |
| Head of Household (under 65) | $20,800 |
| Head of Household (65 or older) | $22,650 |
| Married filing separately (any age) | $5 |
| Qualifying surviving spouse (under 65) | $27,700 |
| Qualifying surviving spouse (65 or older) | $29,200 |
US citizens abroad and alien residents must also comply with the same rules for estate, gift, and estimated tax as those living in the country.
Taxpayers with financial accounts abroad must also report these to the U.S. Treasury Department, regardless of whether they generate any taxable income or not.
Which tax forms do expats need?
Filing your taxes from abroad is largely the same for those living in the US.
You must complete Form 1040 as normal, including details such as your Social Security number, income, and any eligible deductions.
With this completed, you should fill in Form 2555 next. This form calculates any exemptions on earned foreign income and any further credits and exemptions you may be eligible for.
Form 2555 is also used to claim Foreign Housing Exclusion and is filed with other tax forms. You must qualify for an FEIE to claim Foreign Housing Exclusion.
If you’re eligible for exemptions, you may need to fill in several other forms, including:
Form 8833 allows you to claim tax treaty benefits as long as you are eligible.
Form 1116 allows you to claim foreign tax credit if you have paid foreign taxes within a foreign country. This form is vital for avoiding double taxation.
Form 8938 calculates and declares the value of your foreign assets. If you have any foreign financial assets, such as pensions, that either reach or exceed $400,000 by the end of the tax year or over $600,000 at any point during the year, you must file Form 8938.
Form 114 must also be filled out if you have any assets in foreign financial institutions. This declares your assets to the Financial Crimes Enforcement Network of the US Treasury.
Contact your financial advisor if you are unsure which forms to fill out, depending on your personal circumstances.
When does a US citizen abroad pay tax?
If you are a US citizen living abroad, you do not have to file your taxes on a regular due date of April 15.
While you can file on this date if you choose to, the Internal Revenue Service (IRS) grants you an automatic two-month extension to file your return.
This applies to US citizens or resident aliens residing overseas or are in the military on duty outside the US.
This automatic extended date would be June 15. However, if the due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.
How does a US citizen abroad pay tax?
US citizens and resident aliens (including green card holders) living abroad can file taxes in the same way they would if they lived in the US.
Tax returns can be sent via post to the IRS.
Alternatively, if your adjusted gross income (AGI) is within a specified threshold, you can file your tax return electronically for free using the IRS tool known as free file.
Taxpayers with an AGI above the threshold can file electronically using free file’s fillable forms, by purchasing an e-filing software or through an authorized IRS e-file locator service.
It’s worth noting, however, that only a limited number of companies can accommodate foreign addresses, so you may need to shop around for the right provider.
What are the tax exemptions for US citizens living abroad?
While there is no overall tax exemption for US citizens living abroad, often, they do not end up owing anything to the IRS as there are ways they can offset their income.
There are three main tax credits and exclusions US citizens abroad can utilize, including:
The Foreign Earned Income Exclusion (FEIE)
The Foreign Tax Credit (FTC)
The Foreign Housing Exclusion
These safeguards help US citizens abroad avoid paying taxes twice – once to the country where they currently live and again to the US.
Let’s look at each of them in more detail:
The Foreign Earned Income Exclusion (FEIE)
This is the most common tax benefit used by expats.
It allows them to exclude all or a portion of their foreign-earned income from US taxes. For 2023, users of this benefit can exclude up to $120,000 annually in foreign wages.
The FEIE does not apply to all income; passive or investment income is not included.
If you earn above $120,000, your income will be taxed at the normal rate.
Those who have lived abroad for a certain period of time can apply for this benefit by meeting the set qualifications and filing a Form 2555. Those who have moved abroad recently, mid-year, can apply for a partial-year exclusion.
The Foreign Tax Credit (FTC)
Alternatively, US citizens and resident aliens abroad can choose to use the FTC.
The FTC is a tax credit used to offset income tax paid abroad. If you have paid taxes to a foreign country, you can tax an itemized deduction or credit for those taxes and reduce your taxable income in the US.
For example, if you owe $1,000 in taxes and you have an FTC of $300, you will only owe $700.
Choosing carefully between the FTC and FEIE is important, as once you switch from the exclusion to the tax credit, you can’t claim the exclusion again for five years.
The Foreign Housing Exclusion
The Foreign Housing Exclusion allows you to reduce your tax bill by deducting the cost of your property from your gross income.
According to the IRS, this applies to “amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year.”
Expats can alternatively use the Foreign Housing Deduction, which applies to amounts paid for with self-employment earnings.
What are the penalties for failing to file your taxes as an expat?
If you fail to file your taxes properly or miss the filing deadline, you may face some consequences from the IRS.
Initial penalties include compounding fines, but the longer you go without fully filing your taxes, the worse these punishments can become.
Eventually, you could face jail time and risk losing your passport, so it’s important to plan ahead and pay close attention to the relevant tax filing deadlines that apply to you.
Can you use a financial advisor if you are a US citizen overseas?
Maintaining a US-based financial advisor when you live abroad has plenty of benefits.
When it comes to paying your yearly taxes, your financial advisor can help you navigate your tax liability and ensure you’re not paying more tax than you should.
They can ensure you’re making the most of your tax exclusions and credits and file your return correctly and on time.
Your advisor can also help with other financial decisions as an expat, such as where to bank, how to manage your investments and report your assets.
When searching for an advisor, it’s best to double-check if they take foreign clients.
With some providers specializing in expat services, it’s best to know ahead of time if they can help you manage your finances.
Get expert financial advice
If you need help working out your finances, it's important to seek expert advice. A good place to start is Unbiased.
Here, you can get matched with an independent SEC-regulated financial advisor who can ensure you’re making the right financial decisions and not paying more taxes than necessary.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.