For some, it’s a dream come true. For others, it’s an employment opportunity or familial obligation. Many U.S. taxpayers live overseas for a variety of reasons. Those who do must still abide by their federal tax obligations. Here are seven common questions that often arise before or after someone moves to a foreign country.
1. Why Do I Need to File a Return?
U.S. citizens living abroad must file tax returns because the United States taxes its citizens on their worldwide income. In addition, those living overseas need to file a tax return to claim any tax benefits they qualify for, including the:
- Foreign earned income exclusion,
- Foreign tax credit,
- Child Tax Credit,
- Credit for other dependents, and
- Credit for child and dependent care expenses.
These tax benefits aren’t automatic and are available only if a U.S. tax return is filed. Also, U.S. citizens abroad must file a return even if these or other tax benefits substantially reduce or eliminate their federal tax liability.
Taxpayers who relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States must file a dual-status alien tax return and attach Form 8854, “Initial and Annual Expatriation Statement.”
2. When is the Filing Deadline?
Unlike U.S. residents, whose tax returns are usually due on April 15, U.S. citizens living overseas typically have until June 15 to file their returns. Such taxpayers should adhere to this deadline if:
- Both their tax home and residence are outside the United States and Puerto Rico, or
- They’re serving in the military outside the United States and Puerto Rico on the regular due date of their returns.
Eligible taxpayers should attach a statement to the return that indicates which of the two situations applies.
3. What if I Can’t File by the Deadline?
U.S. taxpayers living overseas who can’t meet the June 15 deadline can request an extension. They should file their extension requests electronically to avoid processing delays. For more information on how to electronically request a filing extension, visit IRS.gov/Extensions.
Otherwise, individual taxpayers can request an extension by filing Form 4868, “Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.” Businesses must file Form 7004, “Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.”
In 2022, the extended due date for individual returns is October 17, because the usual October 15 deadline falls on a Saturday. However, under certain circumstances, members of the military on active duty may qualify for an additional extension of at least 180 days to file and pay taxes.
4. How Should I Pay My Taxes?
For taxpayers living overseas, the best way to pay U.S. taxes is electronically. Taxpayers may pay their tax bills via their IRS account online or by using IRS Direct Pay. For more information on these and other payment options, contact your tax advisor or go to IRS.gov/Payments.
Important: Any income received or deductible expenses paid in foreign currency must be reported on a federal tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.
5. Do I Need to File Any Special Forms?
Generally, U.S. citizens with a foreign bank or financial account need to file Form 114, “Report of Foreign Bank and Financial Accounts” (FBAR). This reporting requirement is separate from, and in addition to, any reporting required either on Form 1040, Schedule B; or Form 8938, “Statement of Specified Foreign Financial Assets.” The FBAR isn’t filed with the IRS but is filed electronically using the Bank Secrecy Act filing system.
Taxpayers need to file an FBAR if they had an interest in, or signature or other authority over, one or more foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2021 or any year going forward. Because of this low threshold, taxpayers with any foreign assets should determine whether the FBAR reporting requirement applies to them, as the penalties for failing to file are steep.
In 2022, the original FBAR due date was April 18; however, an automatic extension was granted to October 17 for anyone who missed the original deadline.
6. If I File an FBAR, Do I Need to File Anything Else?
In addition to filing an FBAR, certain taxpayers also need to file Form 8938. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds.
Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Form 1040, Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts. It usually requires U.S. citizens to report the country in which each account is located.
Both the FBAR and Form 8938 require the use of a December 31 exchange rate for transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate for December 31 that’s used consistently.
7. Who Can Help?
For any U.S. taxpayer who’s about to head overseas to live, or already has, a qualified CPA can be an invaluable resource for preparing to move or filing tax returns properly once there. In fact, professional assistance is highly recommended given the complexities involved. Contact us to see how our International financial professionals can help.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.