As an American citizen earning income and wages, you’re a U.S. taxpayer. It’s really that simple. It doesn’t matter where you reside or what country your money comes from, your obligations to the United States and the Internal Revenue Service (IRS) never go away.
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You must report the following types of earned and unearned worldwide revenue:
- Wages
- Tips
- Interest
- Dividends
- Pensions
- Rent
- Capital gains
- Royalties
Foreign income is reported in a similar fashion to your U.S. income on your tax return. Earned income, for example, goes on Line 7 of Form 1040 while dividend income is counted on Schedule B and other income is also reported on specific forms. The process is just like filing your U.S income, although you may need to convert income received abroad into U.S. dollars.
All these sources must be reported even if you don’t receive a W-2 or 1099 statement from your foreign employer.
That said, the U.S. government does offer stipulations to play fair and help with your financial burden. You are, after all, likely paying taxes in the land where you now live, so the U.S. isn’t necessarily interested in making you pay taxes twice on the same income.
Expats, as Americans living abroad are known, can claim theForeign Earned Income Exclusion. This reduces your U.S. tax liability by allowing you to exclude your foreign earnings from income up to an amount adjusted annually for inflation. For 2020, that figure is $107,600. Some specific housing costs may also be excluded on top of that figure.
To qualify, you will need to meet and prove strict residency requirements. You’ll also have to complete Form 2555.
According to the IRS, once you choose to exclude your foreign earned income and/or your foreign housing costs, this choice remains in effect for all future years unless you choose revoke it.
Claiming the Foreign Earned Income Exclusion is completely voluntary, but once you do, you cannot file for other assistance, such as the Foreign Tax Credit, earned income credit or additional child tax credit on the same income. Many expats consult with a tax professional who specializes in expats taxes to determine which provisions offer the greatest benefit to their specific tax situation.
Claiming the Foreign Earned Income Exclusion, however, does not get you off the hook for filing a U.S. tax return. If you try to evade filing foreign taxes, penalties can ve severe and can include monetary, civil and even criminal consequences.
Some good news: If you live abroad, you will receive a tax filing extension, so your tax return won’t be due until after the traditional April 15 tax day. The three qualifications that must be met, according to the IRS, include:
- Being a U.S. citizen or resident alien
- Meeting either the bona fide residence test or the physical presence test, but not until after your tax return is due
- Your tax home is in a foreign country throughout your period of bona fide residence or physical presence, whichever applies
