For U.S. citizens living abroad or earning income from foreign sources, you still have to meet your tax obligations back home. The U.S. tax system taxes worldwide income, which means income earned outside the country must be reported on your tax return, even if you already paid taxes in the foreign country. However, there are several tax benefits and exclusions that can reduce your liability if you know how to take advantage of them.
What Is Foreign Income and When Do You Report It?
Foreign income includes any income earned from sources outside the U.S. Common types include:
- Wages and salaries from working overseas
- Self-employment income from foreign businesses
- Interest and dividends from foreign accounts
- Rental income from properties abroad
- Royalties, pensions, and capital gains from foreign investments
Even if you are living abroad full-time, you are required to report all foreign income on your U.S. tax return. U.S. tax laws apply no matter where you live or earn your money.
Tax Filing Requirements for U.S. Citizens and Citizens Abroad
All U.S. citizens and those living abroad must file a Form 1040 to report their income. The good news is that some benefits are available to help reduce or eliminate double taxation:
- Foreign Earned Income Exclusion (FEIE)
- You can exclude up to $126,500 (for 2024) of foreign earned income.
- To qualify, you need to pass either the bona fide residence test or the physical presence test, proving your tax home is in a foreign country.
- Foreign Tax Credit (FTC)
- If you pay foreign taxes on income not covered by the FEIE—like interest or dividends—you can use the FTC to offset your U.S. tax liability.
- Both the FEIE and FTC require proper filing with Form 2555 and Form 1116, respectively.
How Is Foreign Income Taxed?
Although the U.S. taxes worldwide income, foreign tax benefits can reduce the amount you owe. Here’s how foreign income is treated:
- Earned Income: Wages earned overseas may qualify for the FEIE, reducing taxable income.
- Investment Income (e.g., Interest, Dividends, and Capital Gains): These forms of income are generally not eligible for the FEIE but can qualify for the FTC.
- Rental Income and Royalties: Fully taxable but eligible for the FTC if foreign taxes are paid.
The key to minimizing your tax burden is to ensure proper reporting and claim all available credits and exclusions.
Reporting Foreign Bank Accounts and Assets
In addition to reporting income, U.S. citizens and residents abroad must disclose foreign financial assets. Key requirements include:
- Schedule B (Form 1040): Report any interest or dividends earned from foreign accounts.
- Form 8938 (Statement of Foreign Financial Assets): Required if your foreign financial assets exceed certain thresholds.
- FBAR (FinCEN Form 114): Must be filed if the total value of foreign accounts exceeds $10,000 at any point during the year.
FBAR Deadlines:
- The annual deadline is April 15, with an automatic extension to October 15 if needed.
Failure to report foreign accounts properly can result in hefty penalties. Be sure to use the correct forms and report accurately.
Filing Deadlines and Extensions for Taxpayers Abroad
Taxpayers living outside the U.S. and Puerto Rico receive an automatic two-month extension to file their tax return by June 15. However, any taxes owed must still be paid by April 15 to avoid interest charges.
- Military personnel serving overseas also qualify for the June 15 extension.
- If you need additional time to file, you can request a further extension to October 15, but again, taxes must be paid by April 15 to avoid penalties.
Tips for Staying Compliant and Avoiding Penalties
- Stay Informed: Keep up with changes to tax laws that affect U.S. citizens living abroad.
- Maintain Detailed Records: Keep records of all foreign income, accounts, and taxes paid.
- File on Time: Take advantage of automatic extensions but be sure to meet the deadlines for payment and filing.
- Use Professional Tax Software: Automate calculations and ensure all forms are filed correctly.
