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The US tax system is regarded as one of the most progressive ones in the world. US citizens’ or resident aliens’ (Green Card Holders) income is subject to the US income tax, no matter where they work or live. If you are a US citizen or resident alien living abroad during the tax year, the following items may need to be reported on your tax return:
Gross Income – Income received throughout the tax year, meaning money, self-employment earnings, goods, services, taxable property, and income that is excluded as foreign housing amounts or foreign earned income.
Foreign Income – Foreign currency should be converted into US dollars, no matter you received or paid part or all of your expenses with it.
Tax Liabilities of the US Citizens Living Abroad
Below you can find the most important information on tax liabilities of the US citizens who live and work outside the US.
1. Children Born in the Foreign Country Where You Reside – Are They US Citizens or Not?
As a rule, if you were a US citizen at the time your child was born, your child is a US citizen. Even if the other parent of the child is a non-resident alien, the child was not born in the US, and the child lives outside the US together with the other parent, he/she is a US citizen.
If the child is legally adopted and is not a US citizen, US resident or US national, he/she is considered a US citizen if:
You are a US citizen or US national
The child was a member of your household and lived with you during the whole tax year
2. Claiming a Dependent – What to Include on Your US Tax Return?
You must include each dependent’s SSN (Social Security Number) for whom you claim a US tax exemption. If your dependent is a US non-resident who does not qualify for a social security number, you must provide the dependent’s ITIN (Individual Taxpayer Identification Number) instead of an SSN.
3. Credit – Claim, Deduct, or Exclude
Those working abroad cannot deduct, claim, or exclude a credit for an item that is possible to allocate or change against excluded housing or foreign earned income. You can only deduct expenses with regard to income that is includible.
These rules are applicable for those items that are connected with excluded earned income. They do not refer to items that have nothing to do with a specific type of gross income. A housing deduction is not considered allocatable to the taxpayer’s excluded income, which cannot be said about the deduction for self-employment tax. As for the specific gross income types, these include:
Alimony payments
Charitable contributions
Medical expenses
Mortgage interest
Personal exemptions
Qualified retirement contributions
Retired estate taxes on the taxpayer’s personal residence
Your foreign income can be excluded to a certain limit that has to do with the limit of your annual maximum dollar amount or actual foreign wages (whichever is less). The maximum amount for foreign income tax exclusion set by the IRS for 2015 was $100.800.
4. Foreign Income Tax Exclusion – How to Claim?
You may be eligible for a foreign income tax exclusion from a limited amount of foreign earned income. To qualify, you must:
Reside and work outside of the US
Meet either the Bona Fide or Physical Presence Test
To claim the foreign income tax exclusion, the taxpayer must either:
File/e-file Form 2555, Foreign Earned Income e-file it if he/she is also claiming foreign housing cost amount exclusion
File/e-file Form 2555-EZ, Foreign Earned Income Exclusion e-file it if he/she is only claiming the foreign income tax exclusion
The taxpayer should file either Form 2555 or Form 2555-EZ together with his/her timely filed Form 1040 (US Individual Income Tax Return) e-file it or Form 1040X (Amended US Individual Income Tax Return).
So, if you get your foreign earned income in a tax year that follows the year during which you earned it but did not get it, you are likely to file an amended tax return for the earlier tax year.
5. Foreign Earned Income Exclusion Claimed – How to Claim Other Credits or Deductions?
If you have already claimed a foreign earned income exclusion, you are not allowed to claim a foreign tax credit or deduction on your excluded income. If a foreign tax credit or deduction is applied to any of your excluded income, you will end up with a canceled foreign earned income exclusion.
You may still be eligible for an exclusion from tax of a limited sum of foreign earned income. As a rule, this is the income received for services performed in a foreign country. However, you will be required to file a return to claim the exclusion. Moreover, you may qualify to claim an exclusion or deduction from gross income for a limited amount of housing costs if the latter costs exceed a base amount.
6. Foreign Tax Credit – How to Claim?
To apply for the foreign tax credit, you may be asked to complete and file Form 1116, Foreign Tax Credit e-file it, and then attach it to your 1040 Form e-file it.
7. Foreign Move
According to the IRS, a “foreign move” is a move associated with starting your work at a new job location outside the US and its possessions. Also, it does not include a move back to the US or its possessions.
8. Form 1116 – How to E-File?
You can e-file your Form 1116 together with Form 1040 that can be found on efile.com.
9. Itemized Deduction on US Income Tax Return – How to Claim?
The itemized deduction can be chosen only if you complete and file Schedule A. There exist certain items that are subject to be claimed only as a deduction.
10. Moving Expenses from the US to Another Country – How to Deduct?
The expenses of your move can be deducted if you moved to a new home within the tax year because of some job or business issues.
11. Social Security Taxes of a Foreign Country Where You Live and/or Work
To know whether you are subject to these taxes, you should find out if your country of employment/residence exempts you from double taxation on international Social Security. You can find more details on American foreign tax treaties in IRS Publication 901. As for double taxation, it is the levying of tax by 2 or more jurisdictions on the same declared income, financial transaction, or asset.
Be aware, international Social Security taxes will not be charged from you if your country is included in a Totalization Agreement with the US. Thanks to this agreement, you will not be charged twice on your foreign income if you are a US citizen or resident alien.
The US has tax treaties with more than 42 countries, including Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, South Korea, Spain, Sweden, Switzerland, and the United Kingdom.
US tax treaties or conventions signed with a number of foreign countries make it possible for US residents to enjoy certain exemptions, credits, deductions, and a lower foreign tax rate. What is more, foreign tax treaties allow US teachers, trainees, and students to enjoy special exemptions from the income tax of the given foreign treaty country.
12. Tax Credit on Your US Taxes for Tax Payments to a Foreign Country – How to Take?
Each tax year, US citizens who work and/or live abroad and pay taxes to a foreign country can take the amount of a qualified tax paid or accrued within the year as a foreign tax credit or an itemized deduction.
13. Tax Exemption for Your US Non-Resident Alien Spouse – How to Claim?
If your US non-resident alien spouse does not receive any gross income for US tax purposes and is not considered another US taxpayer’s dependent, it is possible to claim an exemption for him/her on your separate tax return.
14. Travel Restrictions Violation
In case you violate the US travel restrictions, a foreign country will treat you as:
Not physically present
Not a bona fide resident
For any day during your stay in that country.
15. US Foreign Tax Credit – How to Claim It if You Received Foreign Tax Payments as Subsidies?
If you receive your foreign tax payments as a subsidy from a foreign country, you are not allowed to claim a foreign tax credit based on these payments. Subsidies may be provided in the form of:
Credits
Deductions
Discharges of obligations
Payments
Refunds
16. US Foreign Tax Credit Limit
The limit of the foreign tax credit is included in your total US tax. This means it is part of your taxable income earned from sources outside the US compared to your total taxable income. The credit amount cannot exceed your actual foreign tax liability.
17. US Moving Expenses – How to Report?
Your moving expenses should be reported on Form 3903 e-file it. Also, you should report your moving expense deduction on Form 1040 e-file it.
18. US Moving Expenses Vs. Foreign Earned Income – Are They Connected?
Moving expenses have a direct relation to income earned in a foreign country if the latter is a new place of work for you.
19. US Tax Exemption for Your Dependent(s) – How to Claim?
It is possible to claim tax exemptions for an individual regarded as your dependent if the latter meets certain requirements. To qualify as your dependent, the person must be either:
A US citizen
A US national
A US resident alien
A resident of Canada or Mexico
For some period of the calendar year in which your tax year begins.
If you are a US citizen, you are required to file tax returns reporting your earnings wherever you reside. In certain cases, you can reduce the international double taxation, which is the result of the mentioned requirement. This is true of individuals who are bona fide residents of a foreign country or physically outside the US for an extended period of time. Also, the US can provide a foreign tax credit, which allows income tax paid to a foreign country to be offset against the US income tax liabilities referring any foreign income that cannot be covered by the mentioned exclusion.
Do you think the information provided above covers the most important tax-related issues concerning US citizens abroad? Please feel free to share your opinion with us in the comments below.
Gross Income – Income received throughout the tax year, meaning money, self-employment earnings, goods, services, taxable property, and income that is excluded as foreign housing amounts or foreign earned income.
Foreign Income – Foreign currency should be converted into US dollars, no matter you received or paid part or all of your expenses with it.
Tax Liabilities of the US Citizens Living Abroad
Below you can find the most important information on tax liabilities of the US citizens who live and work outside the US.
1. Children Born in the Foreign Country Where You Reside – Are They US Citizens or Not?
As a rule, if you were a US citizen at the time your child was born, your child is a US citizen. Even if the other parent of the child is a non-resident alien, the child was not born in the US, and the child lives outside the US together with the other parent, he/she is a US citizen.
If the child is legally adopted and is not a US citizen, US resident or US national, he/she is considered a US citizen if:
You are a US citizen or US national
The child was a member of your household and lived with you during the whole tax year
2. Claiming a Dependent – What to Include on Your US Tax Return?
You must include each dependent’s SSN (Social Security Number) for whom you claim a US tax exemption. If your dependent is a US non-resident who does not qualify for a social security number, you must provide the dependent’s ITIN (Individual Taxpayer Identification Number) instead of an SSN.
3. Credit – Claim, Deduct, or Exclude
Those working abroad cannot deduct, claim, or exclude a credit for an item that is possible to allocate or change against excluded housing or foreign earned income. You can only deduct expenses with regard to income that is includible.
These rules are applicable for those items that are connected with excluded earned income. They do not refer to items that have nothing to do with a specific type of gross income. A housing deduction is not considered allocatable to the taxpayer’s excluded income, which cannot be said about the deduction for self-employment tax. As for the specific gross income types, these include:
Alimony payments
Charitable contributions
Medical expenses
Mortgage interest
Personal exemptions
Qualified retirement contributions
Retired estate taxes on the taxpayer’s personal residence
Your foreign income can be excluded to a certain limit that has to do with the limit of your annual maximum dollar amount or actual foreign wages (whichever is less). The maximum amount for foreign income tax exclusion set by the IRS for 2015 was $100.800.
4. Foreign Income Tax Exclusion – How to Claim?
You may be eligible for a foreign income tax exclusion from a limited amount of foreign earned income. To qualify, you must:
Reside and work outside of the US
Meet either the Bona Fide or Physical Presence Test
To claim the foreign income tax exclusion, the taxpayer must either:
File/e-file Form 2555, Foreign Earned Income e-file it if he/she is also claiming foreign housing cost amount exclusion
File/e-file Form 2555-EZ, Foreign Earned Income Exclusion e-file it if he/she is only claiming the foreign income tax exclusion
The taxpayer should file either Form 2555 or Form 2555-EZ together with his/her timely filed Form 1040 (US Individual Income Tax Return) e-file it or Form 1040X (Amended US Individual Income Tax Return).
So, if you get your foreign earned income in a tax year that follows the year during which you earned it but did not get it, you are likely to file an amended tax return for the earlier tax year.
5. Foreign Earned Income Exclusion Claimed – How to Claim Other Credits or Deductions?
If you have already claimed a foreign earned income exclusion, you are not allowed to claim a foreign tax credit or deduction on your excluded income. If a foreign tax credit or deduction is applied to any of your excluded income, you will end up with a canceled foreign earned income exclusion.
You may still be eligible for an exclusion from tax of a limited sum of foreign earned income. As a rule, this is the income received for services performed in a foreign country. However, you will be required to file a return to claim the exclusion. Moreover, you may qualify to claim an exclusion or deduction from gross income for a limited amount of housing costs if the latter costs exceed a base amount.
6. Foreign Tax Credit – How to Claim?
To apply for the foreign tax credit, you may be asked to complete and file Form 1116, Foreign Tax Credit e-file it, and then attach it to your 1040 Form e-file it.
7. Foreign Move
According to the IRS, a “foreign move” is a move associated with starting your work at a new job location outside the US and its possessions. Also, it does not include a move back to the US or its possessions.
8. Form 1116 – How to E-File?
You can e-file your Form 1116 together with Form 1040 that can be found on efile.com.
9. Itemized Deduction on US Income Tax Return – How to Claim?
The itemized deduction can be chosen only if you complete and file Schedule A. There exist certain items that are subject to be claimed only as a deduction.
10. Moving Expenses from the US to Another Country – How to Deduct?
The expenses of your move can be deducted if you moved to a new home within the tax year because of some job or business issues.
11. Social Security Taxes of a Foreign Country Where You Live and/or Work
To know whether you are subject to these taxes, you should find out if your country of employment/residence exempts you from double taxation on international Social Security. You can find more details on American foreign tax treaties in IRS Publication 901. As for double taxation, it is the levying of tax by 2 or more jurisdictions on the same declared income, financial transaction, or asset.
Be aware, international Social Security taxes will not be charged from you if your country is included in a Totalization Agreement with the US. Thanks to this agreement, you will not be charged twice on your foreign income if you are a US citizen or resident alien.
The US has tax treaties with more than 42 countries, including Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, South Korea, Spain, Sweden, Switzerland, and the United Kingdom.
US tax treaties or conventions signed with a number of foreign countries make it possible for US residents to enjoy certain exemptions, credits, deductions, and a lower foreign tax rate. What is more, foreign tax treaties allow US teachers, trainees, and students to enjoy special exemptions from the income tax of the given foreign treaty country.
12. Tax Credit on Your US Taxes for Tax Payments to a Foreign Country – How to Take?
Each tax year, US citizens who work and/or live abroad and pay taxes to a foreign country can take the amount of a qualified tax paid or accrued within the year as a foreign tax credit or an itemized deduction.
13. Tax Exemption for Your US Non-Resident Alien Spouse – How to Claim?
If your US non-resident alien spouse does not receive any gross income for US tax purposes and is not considered another US taxpayer’s dependent, it is possible to claim an exemption for him/her on your separate tax return.
14. Travel Restrictions Violation
In case you violate the US travel restrictions, a foreign country will treat you as:
Not physically present
Not a bona fide resident
For any day during your stay in that country.
15. US Foreign Tax Credit – How to Claim It if You Received Foreign Tax Payments as Subsidies?
If you receive your foreign tax payments as a subsidy from a foreign country, you are not allowed to claim a foreign tax credit based on these payments. Subsidies may be provided in the form of:
Credits
Deductions
Discharges of obligations
Payments
Refunds
16. US Foreign Tax Credit Limit
The limit of the foreign tax credit is included in your total US tax. This means it is part of your taxable income earned from sources outside the US compared to your total taxable income. The credit amount cannot exceed your actual foreign tax liability.
17. US Moving Expenses – How to Report?
Your moving expenses should be reported on Form 3903 e-file it. Also, you should report your moving expense deduction on Form 1040 e-file it.
18. US Moving Expenses Vs. Foreign Earned Income – Are They Connected?
Moving expenses have a direct relation to income earned in a foreign country if the latter is a new place of work for you.
19. US Tax Exemption for Your Dependent(s) – How to Claim?
It is possible to claim tax exemptions for an individual regarded as your dependent if the latter meets certain requirements. To qualify as your dependent, the person must be either:
A US citizen
A US national
A US resident alien
A resident of Canada or Mexico
For some period of the calendar year in which your tax year begins.
If you are a US citizen, you are required to file tax returns reporting your earnings wherever you reside. In certain cases, you can reduce the international double taxation, which is the result of the mentioned requirement. This is true of individuals who are bona fide residents of a foreign country or physically outside the US for an extended period of time. Also, the US can provide a foreign tax credit, which allows income tax paid to a foreign country to be offset against the US income tax liabilities referring any foreign income that cannot be covered by the mentioned exclusion.
Do you think the information provided above covers the most important tax-related issues concerning US citizens abroad? Please feel free to share your opinion with us in the comments below.
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