U.S. Income Tax Return:
Do I have to file when I live outside the United States?
When you’re living abroad, the U.S. income tax return process can be super stressful. Trying to find out which forms you need to complete is hard enough and that’s before you’ve got started on the international tax treaty, exchange rates, pensions/retirement accounts and your local bank accounts. It can be difficult to figure out what you owe, which exemptions, exclusions and deductions you can apply and to which types of income they apply to. If that wasn’t enough, there are multiple deadlines throughout the year for different forms, and some carry hefty penalties just for being filed late.
If you’re getting started on your journey of learning about filing US tax returns from abroad, this article is perfect for you.
We’ve simplified the complex so it’s easier to understand.
I live abroad, do I have to file a US tax return?
Most US citizens (including dual citizens and Green Card holders) living abroad do have to file a US federal tax return. This article will help you work out if you need to file.
You’ll need to file a 2023 US tax return when your annual worldwide income exceeds any of these thresholds:
- If you’re single with income over US$13,850
- If you’re married to an American or a Green Card holder with joint income over US$27,700
- If you’re married to a non-American and your own total income is over US$5 (that’s not a typo).
- If you’re Head of Household (Married or Divorced with US dependents) with total income over US$20,800
- If you’re self-employed or have any freelance income during the year over US$400
You’ll need to convert your income into US dollars and compare it to the filing thresholds above. Search Google Currency Converter to help.
What forms do I need to file when I live abroad?
This is the main part of your federal tax return, but many other forms could be required too, depending on your situation. We’ll cover the most common forms here.
Form 8621 (PFIC)
For savings and investments held outside of the United States:
Form 8621 is used to report certain types of investments you may hold. If you have a Stocks & Shares ISA in the UK, a TFSA in Canada or simply invest in Mutual Funds, Units Trusts, Index Funds or something similar outside of the United States, you may need to report aspects of that investment on Form 8621 – Passive Foreign Investment Company or Qualifying Elected Fund.
Helpful Hint: If you’re in the UK and you want an ISA, consider opting for a Cash ISA only.
Read more about Passive Foreign Investment Company.
Foreign Corporation Return:
If you own 10% or more of a non-US company, you may need to file Form 5471. Not everyone has to but please get professional help with this. If you own less than 10% but your spouse or immediate family member also owns part of the company, you still may need to file a Foreign Corporation Return.
Foreign Bank Account Report (FBAR):
The other common filing form for US citizens and Green Card holders living overseas is the Foreign Bank Account Report (FBAR). The FBAR is a fairly simple form to prepare and it asks you to record the highest balance that occurred in each of your non-US bank accounts, investment and retirement accounts etc during the US tax year.
Read more about Foreign Bank Account Report.
Self-employment or property investment income:
Complete Form 8858 (Foreign Disregarded Entities and Foreign Branches) if you have any self-employed income or freelance income to report. You’ll also need to file Form 8858 to report any income and expenses from rental property investments you own outside of the United States, even if they make a loss.
Read more about Form 8858.
Form 3520 & Form 3520-A
Foreign Trusts, Pensions & Retirement Accounts:
If you have an employer pension in the UK or a KiwiSaver in New Zealand, pay close attention to this one. If you’re contributing more money into your pension than your employer is, you may need to report that on Form 3520 and also Form 3520-A. Also, if you have a Superannuation account in Australia and you get the option to add more money to it, please be wary and get in touch with us before you do.
If you are the owner or beneficiary of a Trust or family Trust that was set up outside of the United States you may need to file Form 3520 and also Form 3520-A (Foreign Trusts & Foreigns Gift Return).
Helpful Hint: If you’re in New Zealand, avoid opening a KiwiSaver until you’re fully aware of the US tax consequences.
Read more about Form 3520 & Form 3520-A.
State tax return:
Certain US states also require a state tax return from their citizens and that’s separate from your federal tax return.
When do these forms need to be filed?
The deadline for filing your federal tax return, also known as Form 1040 is usually April 15th but when you live abroad, you get an automatic 2-month extension to June 15.
If you owe tax, that’s still due by April 15, even though the tax return does not need to be filed until June 15th. Even if you apply for an extension, tax due still needs to be paid by April 15 and interest will apply from April 16 onward. A little confusing, we get it.
Many of our clients based in the UK, Canada, Australia and NZ request an extension to file their Form 1040. They do this because they like to wait until they’ve filed their local tax return where they live and then file their US tax return afterward. The first extension which needs to be applied for and gives you until October 15 to file your federal tax return.
State tax return:
Most states copy the Federal filing deadlines and many accept the federal extension too, but not all. Firms with e-file capability can electronically file your state tax return, otherwise you can mail it in. Some states let you file online too.
Foreing Bank Account Report:
Your FBAR form doesn’t go to the IRS, it’s filed online directly with the US Treasury. It needs to be filed by April 15 but you also get an automatic extension to October 15.
You can file your FBAR here.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
What if I’m many years behind on filing my US tax returns?
There is a special tax amnesty program offered by the IRS called Streamlined Offshore Filing Procedure. It’s designed specifically for US citizens and Green Card holders living abroad that genuinely didn’t know they had to file US tax returns.
The program makes it easy to catch up and become fully US tax compliant without the fear of fines and penalties. You can learn all about the Streamlined Tax Amnesty program.
Can I prepare and file my own tax return or use free file software to do it?
You can prepare and file your own tax return. Be realistic about the amount of time it takes to do it properly. The IRS website suggests 16 hours for a basic return for a person with employment income. There is a lot of reading to do and most people have many forms to complete. You’ll need to understand how the country you live in interacts with the United States. Many countries have a tax treaty with the United States and some also have a Totalization Agreement. If you’re self-employed or have any freelance income and live in a country without a Totalization Agreement, such as New Zealand, you’ll need to be extra careful.
When converting your currency into US dollars, you’ll need to use the IRS specified currency conversion rate which you can find at irs.gov
If you own a company in the country you live in, get professional help. Preparing a Foreign Corporation Return (Form 5471) is a highly complex matter and false declarations can lead to big penalties, even if the mistakes are innocent.
Free file software:
Absolutely not! We can’t stress this enough. Free file software is great for people that live in the United States. That’s who it is designed for. They are terrible for people living outside the US. They often lead users astray, incorrectly list important types of income and completely miss pension income, superannuation and other types of retirement and investment interest.
In 2020, we reviewed over 53 tax returns prepared by various free file software providers. The tax returns were for people living abroad. 43 out of the 53 contained serious errors. Some errors lead to tax due when it wasn’t and some generated penalties that didn’t have to be paid! In the event of an audit, these taxfilers would have been left in a sticky situation. It’s not
Learn more about the dangers of free file software when you’re abroad
How do I get started?
- Always work with a firm that specialises in US tax for those living abroad.
- Choose a reputable US tax preparation firm that is licensed by the IRS. It’s easy to find on irs.gov
- Looks for lots of independent reviews on Feefo, Trustpilot and Google.
- Shop around on price, a standard tax return should be prepared, signed by a professional and e-filed for around US$300.
How do I work out my Filing Status?
There are 5 different Filing Status types and it’s important you pick the right one for you and you could have more than one option. They aren’t quite as self-explanatory as you might think and there are big variances in what they give you.
If you’re working with a professional, they will do this for you.
The 5 different filing status options are;
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er)
How do I get a Tax Identification Number (TIN), ITIN or SSN?
Your TIN is the same as your Social Security Number (SSN). If you already have your SSN that’s all you need to file your US tax return.
Many US citizens that haven’t lived in the United States or left when they were very young may not have a Social Security Number, or certainly aren’t aware that they have one. You can contact the Social Security Office to check.
You MUST NOT apply for an ITIN if you’re a US citizen. You must only apply for a Social Security Number.
Contact your local US embassy to arrange your appointment.
Learn more about getting and using a TIN, ITIN and SSN.
Is it true that you can claim the Child Tax Credit Refund when you live abroad?
Yes. There are criteria that you have to meet, but thousands of American families living in another country get refunds every year even without paying a single cent of tax to the US.
From 2023, the Child Tax Credit Refund is up to US$1,600 per eligible child.
You can have the funds paid directly into your US bank account. If you don’t have a US bank account the IRS will send you a check in the mail to your address overseas.
Can I claim the Child Tax Credit Refund for past years?
Yes. You can claim the last three years as long as you’re eligible in each of the three years.
Learn more about the Child Tax Credit Refund criteria and see if you’re eligible.
I’ve been filing, but not correctly. How do I fix it?
You can amend your federal return if there were errors or missing information. Use Form 1040-X: Amended Tax Return to amend your federal return. It is a good idea to review your entire original return when amending a return for a specific reason. Consider looking for things you missed the first time, such as;
- Withholding and
You may end up owing less money or getting more cash back.
If you haven’t been claiming the Child Tax Credit Refund and you’re eligible, you can file amended tax returns up to 3 years back to claim your refund.
If you wish to amend your tax return, you can either e-file or download Form 1040-X from https://www.irs.gov/forms-instructions
When filing by paper, you must mail the form. If you use a tax firm like ours, we can efile amended tax returns.
For taxpayers filing with the expectation of a refund, generally, the 1040-X form must be filed within three years of the original return’s filing date or within two years of the payment of the taxes, whichever is later.
Do U.S. citizens living in Canada have to file U.S. tax returns?
Yes. Even if they hold Canadian citizenship too, it doesn’t change anything in regards to filing US tax returns. There are plenty of things that can make US taxes more complicated too, such as;
- Certain types of TFSAs and RESPs.
- Investing in Mutual Funds
- Renting out a property in Canada
US citizens living abroad can legally create tax free savings accounts, also known as a TFSA in Canada. A big question for many American expats living in Canada is whether they need to file for the IRS forms 3520 and 3520-A as a result of owning their TFSA.
Do U.S. citizens living in the UK have to file U.S. tax returns?
Yes. Even if they hold British citizenship too, it doesn’t change anything in regards to filing US tax returns. There are plenty of things that can make US taxes more complicated too, such as;
- Employer pensions
- Stocks & Shares ISA
- Selling principal home in the UK
- Renting out a property in the UK
Learn more about filing your US taxes from the UK here.
Do U.S. citizens living in Australia have to file U.S. tax returns?
Yes. Even if they hold Australian citizenship too, it doesn’t change anything in regards to filing US tax returns. There are plenty of things that can make US taxes more complicated too, such as;
- One off contribution to Superannuation
- Taking money from Superannuation that hasn’t been declared to the IRS
- Investing in Mutual Funds and Index Funds.
- Selling principal home in Australia
- Renting out a property in Australia
When you leave the U.S. for Australia and intend to stay indefinitely, you might wonder how much of what you own will be potentially subject to U.S. capital gains tax. As an American living in Australia, it’s important to know about the taxes imposed by both of your countries.
Read more about expat taxes in Australia.
Do U.S. citizens living in New Zealand have to file U.S. tax returns?
Yes. Even if they hold New Zealand citizenship too, it doesn’t change anything in regards to filing US tax returns. New Zealand is unique because it has a tax treaty with the United States but it doesn’t have a Totalization Agreement. That means US citizens and Green Card holder in NZ can end up having to pay US Social Security tax and US Medicare. There are other things that can make US taxes more complicated too, such as;
- Being self-employed or a Freelancer
- Holding a KiwiSaver
- Selling principal home in NZ
- Renting out a property in NZ
How long does it take the IRS to process a tax return?
If you file your tax return on time (by June 15) and everything is proper with no questions, it usually takes the IRS six to eight weeks to process a tax return and give any refunds from the date they receive it if you use the traditional paper document format.
How long should you keep your tax returns?
As a general guideline, you should aim to keep your tax returns for at least three years prior to your most recent filing or due date to file, whichever is later.
As part of the Statute of Limitations, the IRS may ask for proof of your returns for a period of three years following your last return, presuming there were no issues with your return.
What happens if I decide not to file?
The consequences can get quite serious. Your US passport can be revoked if the IRS claims you owe them more than $52,000.
If you have certain types of pensions or retirement accounts outside of the US that haven’t been reported on a tax return, you can be fined up to US$10,000 per account.
Failing to file Foreign Bank Account Reports (FBAR) can also result in US$10,000 penalties per account.
The long-reaching arm of US law has already been tested in a Canadian court and the US Government won the case against a dual national Canadian person residing in Canada. The case was about the person not reporting their Canadian bank account information to the US Treasury via an FBAR.
Things changed significantly between 2013 and 2015 when many countries signed up to the US Government FATCA agreement. Part of the new tax laws were designed to track down US citizens living overseas that were investing their money outside of the United States and not filing US tax returns and FBARs to disclose their financial positions.
The FATCA contract that most governments signed basically states that all the banks and financial institutions in their country must report on all financial accounts held by any person that they believe to be a US citizen or Green Card holder. This is why many banks around the world have been asking their customers to confirm if they’re a US citizen and requesting their Social Security Number.
Staying compliant with your US tax returns when you’re living in another country doesn’t have to be difficult. Here at Expat Tax Online we prepare and file over 7,000 tax returns every year for Americans and Green Card holders that live outside of the United States.
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