Tax Information for Americans Abroad

Life for American citizens and American green card holders living overseas is complicated.  Not only are there the rules and regulations of the foreign country to attend to, but the US government imposes a variety of requirements that seem to grow ever longer and more complex.  Nowhere is this more evident than with the tax rules. If you already live overseas you are probably familiar with the basics of tax filings required by the IRS, but it’s a good idea to review them anyway.  If you are new to living out of the US or contemplating a move this brief review will alert you to information you need to keep track of and possibly report to the IRS. This is not an exhaustive review of any of these matters, but will simply put a spotlight on them so you can take further action if necessary.

  • Foreign earned income exclusion—the basic idea here is that a certain amount of foreign income that is considered “earned” from services performed is eligible to be excluded from US tax provided certain conditions are met each year. The predominant requirement is that the taxpayer be either considered bona fide resident of a foreign country for a full year or meet the physical presence test that covers a 365-day period.  There is much more that can be written to flesh out all these rules and requirements, but the important thing to keep in mind is that the foreign earned income exclusion can save you a great deal of tax, especially if you pay little or no tax in the foreign country where you reside.
  • Foreign tax credit—If a lot of foreign tax is paid on income received overseas, whether it be earned or investment, a credit can usually be taken for that tax against US tax liability. The goal of the tax credit is to prevent income from being taxed twice (in the foreign country and the US).  This too is a very complicated area and often treaty language comes into play.  Therefore it is important that information around the foreign income and foreign tax paid be clearly communicated to the tax preparer.
  • FATCA—The Foreign Account Tax Compliance Act requires individual taxpayers to report information about certain foreign financial accounts and offshore assets on Form 8938 and attach it to their income tax return, if the total asset value exceeds the appropriate reporting threshold. This very controversial law has, surprisingly, been adopted by many foreign countries and their banks who are being very conscientious about identifying American account holders and either closing their accounts or dutifully sending account information to the US.  It is therefore a good idea to prepare and attach this form to your tax return if the total amount of assets warrants the form—even though it is largely duplicative of the FBAR form (which also must be filed if account amounts indicate it is necessary).
  • FBAR—The Report of Foreign Bank and Financial Accounts is commonly known as the FBAR. This report, which goes directly to the Treasury Department, is required if you have a total of more than $10,000 in foreign accounts.  Of course, what constitutes a foreign account is a complicated topic and may require some consultation with your tax preparer.  Many taxpayers find that pulling this information together is an onerous task, but the penalties for failing to file the form are quite stiff so it is worth the effort.