The 5 most common US expat tax questions: Answered
Nathalie Goldstein, enrolled agent and CEO of MyExpatTaxes, gets a lot of tax questions from US expats in Germany. In this article, she puts together some of the most common ones and gives them an answer – once and for all!
Tax season is coming up, which means many American expats will have to follow their tax duty and file taxes this year. This depends on how much income you make yearly, but another reason for filing US taxes is to be eligible for stimulus checks - a new wave of economic support for American citizens during the coronavirus pandemic.
It’s important to be aware of your tax responsibility as an American abroad because tax laws change every year. With talks ongoing about more stimulus checks and how expats will be impacted, it’s a lot to process. US expats undoubtedly have a lot of questions, so here’s an overview of what you need to know.
1. Do I need to file US expat taxes?
Whether you’re living in the US or abroad, every US citizen is obligated to report their worldwide income to the IRS every year, based on a few filing requirements. Just check your US passport, which confirms that every citizen needs to honor this tax duty.
You need to file a US tax return if you are an American expat, under 65 years old, and your gross income is over the following thresholds:
- Single: 12.400 dollars
- Married filing jointly: 24.800 dollars
- Married filing separately: 5 dollars (also applies if you are Married Filing Jointly, but living apart from your spouse)
- Head of household: 18.650 dollars
Any minors or dependents need to start filing once they earn income that is over the threshold. This information is listed on the IRS’s “Filing Requirements for Dependents page”.
Make sure to submit your tax return by June 15 every year to be in good status with the IRS. If you need more time to file a return, you can apply for a tax extension.
2. Do I owe US taxes as an American abroad?
A common concern amongst expats is whether or not they owe any US tax. This is normal because the US is one of only two countries that tax their citizens no matter where they are in the world.
The good news is, expats will most likely not be double-taxed and owe US taxes. This is due to benefits like the Foreign Tax Credit and Foreign Earned Income Exclusion:
Foreign Tax Credit
The FTC is a dollar-for-dollar reduction on your foreign income. For example, if as a resident of Germany you paid 300 euros to the German government, you can take a 360-dollar credit (depending on the exchange rate) and apply it to any US taxes you owe - thus subtracting 360 dollars from your US tax bill.
Foreign Earned Income Exclusion:
American expats can also exclude up to 107.600 dollars of foreign-sourced income from taxation in 2021. This type of income must be earned solely from sources outside the US.
To qualify for this exclusion, you need to be a registered resident in a foreign country and subject to local income taxes for a full calendar year. Or, you to have lived outside of the US for 330 full days in a consecutive 12-month period that begins or ends in the tax year.
Tax treaties are another way not to be double-taxed. They allow US residents in foreign countries to be taxed at a reduced rate on certain types of income from US sources. Furthermore, expats can also be exempt from US income taxes on certain income items.
Each exemption and reduced rate differs from country to country and on specific items on income. This is why you must get to grips with what the tax treaty is in your foreign country. Germany, for example, has a tax treaty with the US, allowing US expats to be spared from double taxation on items such as social security benefits.
3. How can I get the stimulus check?
In March 2020, the US administration sent out stimulus checks to halt economic damage and provide monetary support to families during the pandemic. US expats could receive the check if they were a non-filer or had a 2018 / 2019 tax return on file. These checks were around 1.200 dollars or more, depending on each expat’s case and family situation.
Now in 2021, the second batch of stimulus checks have already been released for qualifying taxpayers and dependents. The check amount is lower – 600 dollars each. Americans abroad may have received the check via direct deposit, because their bank details were in the last tax return, or by paper check.
If you didn’t qualify for the first round of stimulus payments last year, you might be able to this year, so make sure you file a 2020 tax return, even if you did not earn any income. The value of each stimulus check is calculated based on previous years’ tax returns. Therefore, some US citizens abroad weren’t eligible to get the check.
Now, expats can have their previous income re-evaluated based on their 2020 income and whether it’s below the adjusted gross income threshold that allows you to receive a check.
4. I’m a parent, do I get special tax benefits living abroad?
As an American parent, you can claim up to 2.000 dollars in non-refundable credit for each of your qualifying children on your tax return. Each qualifying child must be under 17 and have a valid Social Security Number (not an ITIN!).
So, for every child you have, you can take up to 2.000 dollars off your US tax bill - if you owe taxes. But if you don’t owe taxes - like most expat families - then 1.400 dollars of this credit amount is refundable. The US still provides financial assistance to families who live abroad. They give it in tax credits and refunds, regardless of where expats work and live.
Therefore, it’s possible to get money back for every qualifying child you have, even if you don’t pay income taxes to the US. Even if you’ve used tax benefits like the FEIE on your return, you can amend previous tax returns to save and / or receive more money.
5. How do I make up for previous tax years?
It’s no fun when the IRS gets an alert that you haven’t been filing your US taxes from abroad and sends you letters as reminders. Because, by the time you get a letter, you already have penalties stacked up.
So while many expats are innocent in forgetting or not knowing they have to file US taxes, the consequences of getting caught by the IRS are unfortunate. In most cases, though, expats won’t get sent a letter with penalties but instead are given time to make up lost years of tax filing, penalty-free.
The Streamlined Procedure is a tax amnesty program set up by the IRS that allows American citizens to make up and amend former tax returns without monetary consequences. Most importantly, it works for individuals who have not been contacted by the IRS yet and were not deliberately trying to refuse to file.
In just a matter of hours, you can make up to four years of tax returns, plus seven FBARS (bank reports).
Do you need help filing or amending your tax returns, advice on receiving stimulus checks, or have you just got more questions about expat taxes? MyExpatTaxes is on hand to help! They offer one of the most affordable packages out there, because they know expats shouldn’t burn a hole in their wallet.