Filing Taxes as a U.S. Citizen or Green Card Holder Living Abroad

Admin 07/12/2024 2:39pm

As a U.S. citizen or green card holder living abroad, you might be wondering what your tax obligations are, especially when you earn income in a foreign country. The U.S. has one of the few tax systems that requires its citizens and residents to file taxes on their worldwide income, no matter where they live. Here, we’ll break down the tax filing requirements for U.S. citizens and green card holders living abroad and offer some tips to make the process easier.

1. Filing U.S. Tax Returns from Abroad  

If you're a U.S. citizen or a green card holder, the IRS treats you as a U.S. tax resident regardless of where you live. This means that whether you're earning wages, interest, or dividends in the U.S. or another country, you must report that income on a Form 1040 (U.S. Individual Income Tax Return). Even if your total income doesn’t exceed the $120,000 Foreign Earned Income Exclusion threshold, it’s still necessary to file to report your income and potentially take advantage of credits or exclusions.

2. Foreign Earned Income Exclusion (Form 2555)  

The Foreign Earned Income Exclusion (FEIE) is one way to reduce your U.S. tax liability on income earned while living abroad. For the 2023 tax year, you can exclude up to $120,000 of foreign earned income, as long as you meet one of the following tests:

- Bona Fide Residence Test: You qualify if you have been a resident of a foreign country for a full calendar year.

- Physical Presence Test: You qualify if you’ve been physically present in a foreign country for at least 330 full days during any 12-month period.

If you meet either of these tests, you can file Form 2555 to claim this exclusion.

3. Foreign Tax Credit (Form 1116)  

If you are paying income taxes in the country where you reside, you may be able to claim a Foreign Tax Credit to offset your U.S. taxes. This prevents double taxation on the same income. You’ll need to file Form 1116 to claim this credit. While the Foreign Earned Income Exclusion reduces your taxable income, the Foreign Tax Credit reduces your tax liability dollar-for-dollar for taxes paid to the foreign government.

4. Filing Requirements for Foreign Bank Accounts  

If you have foreign bank accounts, you need to be aware of additional reporting obligations. The two main forms to be aware of are:

- FBAR (FinCEN Form 114): If the combined value of all your foreign bank accounts exceeds $10,000 at any point during the year, you must file an FBAR. This form is not filed with your tax return but is submitted electronically to the U.S. Treasury via FinCEN’s website.

- Form 8938 (FATCA Reporting): If you have foreign financial assets exceeding certain thresholds (which vary depending on your filing status and whether you live abroad or in the U.S.), you may need to file Form 8938. This form is submitted along with your tax return to report foreign financial accounts and other specified assets.

5. Tax Treaties  

The U.S. has tax treaties with many countries, including New Zealand. These treaties can sometimes offer relief from double taxation or clarify which country has the primary taxing rights over certain types of income. If you're working abroad, it's a good idea to consult the U.S. tax treaty with your country of residence to see if any treaty benefits apply to you.

6. Avoiding Double Taxation  

For U.S. citizens and green card holders living abroad, the primary tools to avoid double taxation are the Foreign Earned Income Exclusion and the Foreign Tax Credit. However, you can only use one for the same type of income. For instance, if you’re claiming the Foreign Earned Income Exclusion, you cannot also claim the Foreign Tax Credit on that income. But if you have additional income (such as interest or dividends) not covered by the exclusion, you may still be able to claim the Foreign Tax Credit on that portion.

7. Important Deadlines  

If you’re a U.S. citizen or green card holder living abroad, you have an automatic extension until June 15 to file your U.S. tax return, but any taxes owed are still due by April 15. You can request a further extension until October 15 if needed.

8. Key Forms to File  

To summarize, here are the key forms you may need to file as a U.S. citizen or green card holder living abroad:

- Form 1040: U.S. Individual Income Tax Return

- Form 2555: Foreign Earned Income Exclusion (optional)

- Form 1116: Foreign Tax Credit (optional)

- FBAR (FinCEN Form 114): Reporting foreign bank accounts over $10,000

- Form 8938: FATCA reporting for foreign assets over certain thresholds

Final Thoughts  

Navigating U.S. taxes as a U.S. citizen or green card holder living abroad can be complex, but the U.S. tax system does offer ways to avoid double taxation. Make sure to take advantage of exclusions or credits available to you, and don’t forget about your reporting obligations for foreign financial accounts.

For personalized advice on how to structure your business, please contact us at info@arbstax.com. We provide free Q&A sessions and free consultations for 1h!