In this article, we will discuss the important things to know about US expat taxes. If you want to skip our detailed analysis, go directly to 5 Things to Know About US Expat Taxes.

If you are a US expatriate living in a foreign country, there is still time for you to claim the COVID-19 stimulus checks. This is particularly relevant if you have not filed income tax returns since 2019 and have not previously requested the COVID-19 stimulus check. It is time to avail yourself of these financial benefits before June 15, 2024. We will also discuss crucial details related to the COVID-19 stimulus claims, such as eligibility criteria and instructions for claiming later on in the article, so continue reading the article until the end.

US Expat Taxes

According to the U.S. Department of State’s Bureau of Consular Affairs, the United States had an estimated 9 million US citizens living abroad in 2020. Like US citizens living in the United States, US expats are also bound to file income, estate, and gift tax returns. Expats are subject to tax on their income from all sources and are required to pay taxes under the Internal Revenue Code if they have tax owing after the credits and exclusions we’ll mention. Americans living abroad can benefit from certain tax benefits, including foreign earned income inclusion and foreign tax credits among others. However, it is necessary to file a US return to avail of these benefits.

Tax compliance while living abroad presents many complex challenges. A taxpayer in the United States spends an average of 13 hours preparing documents and forms for their tax returns. The tedious process often involves delays from the agencies, with only 10% of the callers making it through to an agent. The tax system in the US can often be confusing and time-consuming, especially for US expats having to submit additional forms to the IRS and other government agencies. Among the forms that US citizens residing abroad have to fill out, Form 1040 is the most common one. However, the number of forms can change depending on specific situations. This is why hiring an agency to file your tax returns can help US citizens avoid the exhausting process. By gaining a detailed understanding, expats can strategically utilize their specific benefits and potentially reduce their tax burdens. 

Dual Citizenship Tax Regulations

US expats are residing in various countries all around the world. Among the countries with the most American expats, Germany is a top country with over 5% of Americans living there. Most of the Americans in the country are residing in the Bavarian region, Berlin, Munich, Hamburg, and Frankfurt. Germany has 152,639 US residents living in the country. Recently, On January 19, Reuters reported that Germany made a significant move by relaxing its citizenship requirements. The country has changed its policy for dual nationality by minimizing the required years to 5 years from 8 years previously. Germany aims to attract skilled individuals from all over the world. Being one of the top countries with American expats, US expats may also consider applying for a dual nationality. A US citizen who is a permanent resident of Germany will be taxed the same way as a US citizen with German citizenship. With German citizenship, that person will be in an excellent position to renounce US citizenship.

What Happens If Expats Don’t File Their Taxes?

The US expatriates who do not file their taxes promptly face multiple penalties by the IRS. Initial penalties for nonfiler expats begin at 5% of their owed taxes, which can further increase to 25%. Living abroad does not exempt US citizens from filing their taxes. Ignoring these obligations could result in stronger penalties and even criminal charges. If an expat misses filing forms such as IRS 8938 or FBAR, it can lead to even harsher ramifications. US citizens in foreign countries must ensure timely filing to avoid penalties and maximize their tax benefits.

Now, let’s have a look at the 10 things you need to know about US expat taxes.

Methodology

To compile our list of the 10 things you need to know about US expat taxes, we conducted exhaustive research by reviewing multiple tax information websites and picked the tax essentials based on a consensus. We then verified all details from the official IRS website to provide a comprehensive insight into the US expat taxes.

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10 Things to Know About US Expat Taxes

10. Tax Filing Requirements and Tax Forms 

The IRS has recently released the new tax filing requirements for Americans. Whether you, as a US expat, need to file taxes, depends on your filing status and worldwide gross income. The tax filing requirements for the 2023 returns, to be filed in 2024 are $13,850 for single individuals and $27,700 for married individuals filing jointly. For qualifying widows/widowers, the tax deduction is $27,700, and for the head of household, it is $20,800.

Understanding your tax forms is a significant step in filing your taxes. There are hundreds of tax forms and schedules. The amount of forms an expat has to fill out can change according to their specific situation and eligibility for different tax benefits. The most important tax form through which every US citizen reports their income to the IRS is Form 1040. Expats must fill out the core form to file for their annual federal income tax returns. Some other forms include FBAR, Form 2555, Form 1116, Form 8939, and Form 8621 among others. These forms must be filled out and submitted to the respective authorities if required. Form 2555 and 1116 are required to avoid being double-taxed on income while living abroad. Whereas, the other forms are related to assets, financial institutions, and foreign corporations.

9. Deadlines and Penalties

The deadline for US residents to file their 2023 taxes is April 15, 2024. However, the IRS automatically extends the deadline for US expats for two months. This gives the US citizens living abroad time to file their taxes till June 15. Since June 15 falls on a weekend this year, the date will automatically be extended to June 17.

Living abroad does not absolve you of your tax responsibilities. If US expats fail to file their taxes, it can result in multiple penalties. Recently, the IRS has increased its penalty interest rates to 8% for 2024.

8. Foreign Financial Accounts

Knowing about the report of foreign banks and financial accounts (FBAR) is among the most crucial things to know about US expat taxes. If an expatriate holds foreign accounts that exceed $10,000 in aggregate value during the calendar year, they are required to file through FinCEN’s system. The filers are required to keep a detailed record of up to five years. There are multiple penalties for not complying with the regulations. The details required for FBAR usually include account name, account number, name and address of the foreign bank, type of account, and maximum value during the year.

7. Self-Employment Tax

If US residents living abroad are self-employed, they will have to pay a self-employment tax separately based on their net profits. It comprises social security and Medicare taxes for individuals working for themselves. The process of filing the self-employment tax is similar to wage earners residing in the United States. The self-employment tax rate for 2023 is 15.3% of the net profit of an individual’s earnings. This is divided into 12.4% for Social Security and 2.9% for Medicare.

This is applied to the first $160,200 of the earnings of the self-employed expatriate. The social security portion stops when the combined wages and self-employment income exceed the income thresholds ranging from $125,000 to $250,000, depending on the filing status.

6. Retirement Abroad Tax

A US citizen abroad will generally be taxed the same as if he were in the US (although some re-sourcing by treaty can occur). However, foreign US residents living abroad with a pension can get relief from double taxation. Form W-8-BEN is used by a non-resident alien, who is not only someone who not only lives overseas but is also not a US citizen. The filer must mention their taxpayer identification number on the form. Some income tax treaties allow taxation only in the resident country, guided by the treaty’s residence article. However, it is imperative to go through the treaty articles and understand the true meaning of the terms to avoid misinterpretation. 

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Disclosure: None. COVID-19 Stimulus Checks and 10 Other Things to Know About US Expat Taxes is originally published on Insider Monkey.