As you probably are aware by now, U.S. citizens are taxed on their worldwide income regardless where they reside. If you haven’t heard about this already, your foreign bank will remind you of your obligation to Uncle Sam. Yes, it happens whenever you try to open a bank account with your U.S. passport. However, not only U.S. citizens have to file their tax returns while residing overseas! Do you know that the rule applies to Green Card holders too? As you move your life overseas, other reporting requirements will apply to you. And 1040 form you know will no longer look the same.
What are the different reporting requirements?
You have a new reporting obligation if you hold any foreign financial account. Even if it does not produce any taxable income, you need to report it by answering the question on your tax return, Schedule B. Depending on the aggregate value of your foreign financial assets, new forms will apply.
The Report of Foreign Bank and Financial Accounts aka FBAR
If you have a financial interest in a foreign financial accounts/assets with an aggregate value of $10,000 or more, you have to file an FBAR. The foreign financial account can be a bank account, brokerage account, mutual fund, trust or another type of financial accounts. This form must be electronically filed with the Department of Treasury through FinCEN’s BSA E-Filing System.
Note: It is not filed together with your tax return.
Do not forget to file your FBAR as the penalties may be quite hefty: $10,000 for non-willful violation.
Statement of Specified Foreign Financial Assets – Form 8938
Some taxpayers holding foreign financial assets might have to file additionally form 8938. The reporting requirement is triggered when specific individuals living outside the US hold total value of financial assets of more than $200,000 on the last day of the tax year or $300,000 at any time during the year.
Note: This form filed together with your tax return and in addition to the FBAR. Filing an FBAR does not relieve you from the obligation to file the 8938 form and vice versa. The IRS created a chart for the comparison of these two forms and you can access it here.
Another thing you will be reporting on your tax return, Schedule B, is your foreign trust. If you own a foreign trust, you have a reporting requirement to answer the question on your Schedule B and file a form 3520.
The Foreign Earned Income Exclusion – form 2555
By far, the most exciting form for US person residing abroad as it gives an opportunity for expats to exclude up to $102,100 of their foreign earned income on their tax returns! The IRS adjusts the exclusion each year by the inflation. You need to meet one of two test in order to qualify for the FEIE: the Physical Presence Test or the Bona Fide Residence test.
The Physical Presence Test: You need to stay outside the US for 330 full days during a 12-month period. The 12 months must be consecutive, but it does not mean that the 12-month period must be the same as the tax year. If you’re having problems calculating your days, check out our FREE FEIE TOOL.
The Bona Fide Residence Test: You meet the Bona Fide residence test if you reside in a foreign country for an uninterrupted period that includes an entire tax year. The test also takes into account whether you intend to come back to the US etc.
For more information on Foreign Earned Income Exclusion, click here.
Once you stop claiming the FEIE while residing overseas, you cannot claim it for 5 years. Thus once you start, you might want to continue each year you reside abroad and qualify for it.
The Foreign Tax Credit and the form 1116
The second most common method to eliminate expats tax owing is the Foreign Tax Credit claimed on form 1116. It’s one of the most important forms and you should remember about it when filing your expat tax return. It helps you to offset any US tax liability you might have with the dollar-to-dollar amount you have paid of foreign tax.