During my trips, I have met many travelers who are working along with their travels, also known as digital nomads. With the laptop resting on their lap, they sip cocktails while relaxing at a sunny beach. But at the same time, they are delivering projects for a client. The successful delivery of a project is going to sponsor their next trip.
More people than ever before are pushing themselves out of their comfort zones and choosing to live abroad. As technology allows the world to become more connected, and with the rise in the “gig economy”, many have realized they can work from anywhere.
What is not always so obvious to a new American expat is that the IRS still expects US citizens to file an income tax return regardless of where in the world they live or where they earn the income.
Here are a few things that the first-time expat needs to know.
The filing deadline is different
As virtually everyone knows, the normal deadline for filing taxes is the 15th of April. But expats receive an automatic filing extension until the 15th of June. If you still need more time you can file for another extension to the 15th of October.
There are exemptions that reduce your taxes
There are two exemptions that are most common for expats – the Foreign Tax Credit and the Foreign Earned Income Exclusion (FEIE).
If an expat has paid taxes to their country of residence, they can claim a credit for that tax paid by filing Form 1116. Excess credit is allowed to be carried to future years.
If you can prove your foreign residency, you can claim the FEIE on Form 2555. This exempts an expat from taxes on up to $100,000 in foreign income.
Finally, there is a Foreign Housing Credit available for expats.
There are some additional requirements
The Foreign Bank Account Reporting (FBAR) regulations require that all expats with foreign investments or foreign bank accounts containing over $10,000 must file a report. Note that this applies not only to the account owner, but also to anyone with signatory authority over the account.
In addition, expats must submit FATCA Form 8938. This form is submitted along with the tax return and reports foreign assets such as investments and bank accounts if they exceed $200,000.
If you didn’t know these requirements, there is relief.
The IRS noticed that a significant number of expats were not aware that they had filing requirements. In response, they started a program known as Streamlined Procedure. Under this program, expats to submit past-due tax returns and FBAR forms without fearing penalties. Expats can catch up on 3 years of late tax returns and 6 years of late FBAR forms. The only additional requirement is that they declare the late filing to be non-willful in nature.
If back taxes are owed, you must still pay them along with interest. But expats usually owe very little in taxes because of the many exemptions available to them.
The state still wants their taxes
State income tax returns must still be filed unless a person has moved overseas permanently and does not have family ties or financial ties to the last US state of residence.
Conclusion
Living abroad can be an adventure, but filing taxes should not be. The consequences of making a mistake are severe, so seek professional tax assistance. Visit Taxes for Expats today to get started.