Top 5 US Tax Facts Expat Employees Need to Know
Many US expat employees aren’t clear about the tax rules and filing obligations for Americans working abroad. This is because tax filing requirements for Americans living overseas can seem counterintuitive, and complex, too.
In this article we’re going to reveal the 5 top US tax facts that Americans on assignment abroad need to know. Please note though that each expat’s individual circumstances will determine the best strategies to ensure that they not just remain compliant, but file to their maximum benefit too, so it’s always worth consulting a US expat tax specialist.
1 - Expats still have to file US taxes
All American citizens and green card holders are required to file a US federal tax return, reporting their worldwide income, whether they live in the states or abroad.
This is the case regardless of the length of the assignment overseas (unless it’s very short, such as just a few months).
Americans living overseas may also have to continue filing state taxes, depending on the rules in the state where they last lived before relocating abroad, what ties if any they’ve retained there, and how long they’ll be abroad for.
2 - IRS exemptions rather than Tax Treaties reduce the US tax you owe
The US has tax treaties with around 100 other countries, but 99% of expats won’t benefit from them. The exceptions are students, teachers, and expats working in R&D.
Instead, to reduce US taxes owed on income earned while working abroad, Americans on assignment overseas must claim one or more exemptions that the IRS has made available for this purpose.
The two most common exemptions are the Foreign Tax Credit, which allows expats to claim US tax credits to the same value as foreign taxes that they’ve already paid, and the Foreign Earned Income Exclusion, which lets expats exclude the first around $100,000 (the exact figure rises a little each year based on inflation) of their earned income from US taxation so long as they can meet one of two IRS tests to prove that they live abroad. There are other exemptions too, depending on expats’ circumstances (e.g. the Foreign Housing Exclusion).
While claiming these exemptions most often reduces the amount of tax expats owe the IRS to zero, it’s important to calculate which exemptions will benefit each particular expat the most.
3 - There are extra US filing requirements for expats
As well as filing, expats often have to report any foreign bank or investment accounts that they may have (including most foreign pension schemes) by filing an FBAR (Foreign Bank Account Report). Expats with over $10,000 in foreign bank or investment accounts at any time during the year, including accounts that they have signatory authority or control over such as a business account, are required to file an FBAR by filing FinCEN form 114 online.
Separately, expats with over $200,000 of foreign financial assets also have to file form 8938 to report them, while expats with interests in foreign registered corporations or trusts also have US reporting obligations.
4 - Expats normally have to file host country taxes, too
Americans working overseas almost always have to file host country taxes too, depending on the rules in the country where they are based. Some countries, notably in the Middle East, don’t have income taxes, but most European countries On the other hand have higher income taxes than in the US. Some firms that send US employees abroad arrange to compensate employees who pay a higher rate of income tax abroad. Expats who need to file foreign taxes should always do so first, as this allows them to accurately understand the implications for their US tax return.
5 - Social security payments may be covered by a Totalization Agreement
The US has treaties known as Totalization Agreements currently with 26 other countries that let Americans living in those countries pay either US or foreign social security contributions (but not both) that count towards both countries’ pensions schemes. Typically, if an American will be working abroad for less than 3-5 years and then returning to the US, they will continue paying US social security taxes and won’t have to pay host country contributions. If they are planning to stay abroad longer though, they will normally have to pay social security taxes in their host country rather than to the US.
In summary, Americans working abroad still have to file US taxes, but when they do so they can claim one or more exemptions that in most cases reduce their US tax due to zero. They may also have extra US reporting requirements relating to any foreign accounts, investments, business interests or assets they may have. Remaining compliant and doing so in a way that achieves maximum benefit though depends on each expats’ personal circumstances, so if in doubt, seek expert advice.
Bright!Tax (brighttax.com) is a leading provider of US expat tax services, and has been lauded for many groung-breaking innovations that help simply the process of filing US taxes from abroad. Bright!Tax provides a full spectrum of US expat employee tax compliance services. If you have any questions, don't hesitate to get in touch.