What Taxes Do US Expats Have to Pay to the IRS?

A big mistake many U.S. expatriates tend to make is assuming that because they live outside the United States, they are therefore exempt from U.S. tax requirements. While this argument may seem to make sense on its face, the reality is actually quite the opposite. The U.S. is one of only two countries that imposes tax burdens based on country of origin instead of geographical location (Eritrea being the only other country with this policy). This means that expats are still on the hook for U.S. taxes on worldwide income earned over the course of the tax year.

That being said, there exist certain exemptions and deductions Americans can use to significantly reduce their tax bill. These breaks depend on a number of factors, some of which will be covered here. For a full accounting of which tax codes apply to your particular case, turn to the expertise of Ted Kleinman, a CPA with more than three decades’ experience helping clients living around the globe to navigate the American tax system. For more information, call (541) 923-0903 today.

Types of Taxable Income for Expatriates

It is important to remember that the U.S. government levies taxes for all worldwide income earned by its citizens, regardless of their location. Some of this income is eligible for exemptions, namely active income – wages earned from an employer or income as a self-employed worker. Passive income – money earned from things like collecting rent or investing in foreign markets – is not generally eligible for deductions or exemptions, even under codes that specifically apply to Americans living abroad.

If you live overseas and have questions about which parts of your overall income could be tax-exempt, contact a qualified accountant today.

Exemptions and Deductions for American Expats

While American expatriates still have to file an income tax return with the Internal Revenue Service, much of their income could be exempt under a commonly used feature called the foreign earned income exclusion. This exemption allows U.S. taxpayers who reside overseas to exempt up to $105,900 from their taxable income in 2019, though this only applies to active income earned for services offered outside the United States. Those individuals who want to apply for the exclusion must pass one of two tests used by the IRS in determining eligibility for the FEIE:

  • The bona fide resident test requires that a taxpayer lives as a bona fide resident of a foreign country for a length of time that includes a full tax year.
  • The physical presence test requires that a taxpayer spends at least 330 days outside the United States over a contiguous 12-month period that starts or ends during the tax year.

Although the IRS does not necessarily grant the exemption to everyone who meets one of these standards – the agency reviews each application on a case-by-case basis, then issues a ruling depending on several different factors – their final decision is based largely on the details you report on Form 2555, Foreign Earned Income.

Additional tax breaks are available to expats through the foreign housing exclusion or deduction. This can be used to reduce your tax burden based on the amount you have paid for housing costs over the tax year. The exclusion applies to costs covered by employer-provided wages, whereas the deduction applies to income earned as a self-employed worker. The maximum amount you can deduct or exclude in a given year is usually about 30 percent of the FEIE limit – in 2019, that would be $31,770 – though this percentage can change depending on the location of the housing.

What to Do If You Owe Taxes to the IRS

If you recently realized that you have missed reporting some amount of income or assets to the IRS in past years, don’t worry; the agency has streamlined reporting procedures that will allow you to square that debt without incurring penalties. This process is available to anyone who is not under civil investigation by the IRS and whose lapse in payment was a result of ignorance, rather than willful negligence. Even though tax returns submitted this way will not be subject to the usual failure-to-file or failure-to-pay penalties, they can still be selected for audit under the IRS’s standard auditing procedures, just like any other tax return.

The streamlined filing procedures comprise a series of seven steps that include providing the last three years’ returns, along with all delinquent paperwork or payments and several signed statements. An experienced tax professional can guide you through the process and help you avoid fines and fees.

Don’t Let Tax Obligations Complicate Your Life Overseas

Whether you work for a company or are self-employed, an American living and working overseas probably has a lot to think about without having to deal with the U.S. tax system. Contacting a knowledgeable CPA can help ease your worries and prevent the kinds of fines and penalties that can plague anyone whose returns include mistakes or are missing information. Ted Kleinman and his team of accountants have more than 30 years’ experience working with expats. To enlist the aid of a skilled professional, call U.S. Tax Help today at (541) 923-0903.