Top 7 tax questions for U.S. expats answered
The tax software of MyExpatTaxes makes U.S. Expat tax filing easy and fast. It can help you identify the most optimal tax filing status for your unique situation!
It’s that time of year when Americans living in the U.S. and abroad are getting their documents prepared for the upcoming tax season. For many, it’s a stressful time of the year, even more so for expats who may not know they are required to file U.S. taxes if they reach the filing requirements or want to claim their Stimulus Payments. With ongoing stimulus payments and tax changes due to the pandemic, it’s normal to feel overwhelmed regarding what you need to prepare for and do as an American expat in 2021. Here are the top seven tax questions for U.S. expats to help you out!
1. What are the 2021 tax filing requirements for expats?
Before knowing the tax filing requirements, you need to understand what your filing status is. Here’s a quick breakdown of the common filing statuses:
- Single: Not married in the U.S. or abroad.
- Married Filing Jointly: Married and you want to file a tax return with your spouse (they must be a U.S. Citizen / Green Cardholder with an SSN or a Non-Resident Alien with an ITIN).
- Married Filing Separately: Married, however your spouse doesn’t want to be included on your tax return or cannot be included as they are a non-U.S. citizen. You can also file under this status if you are not living with your spouse at the end of the year due to separation or if you are in the process of divorce.
There are also less common filing statuses such as Head of Household and Qualifying Widow.
Once you identify your filing status, you can check if your gross income from worldwide sources is equivalent to the amounts shown below:
- Single: 12.400 USD
- Married Filing Jointly: 24.800 USD
- Married Filing Separately: 5 USD
- Head of Household: 18.650 USD
- Qualifying Widower: 24.800 USD
If you are 65 or older, these amounts are slightly higher! Additionally, if you’re self-employed, you need to file a tax return if your net earnings are at least 400 USD. This is even if your worldwide gross income is below the tax filing threshold.
2. Do I have to pay U.S. taxes?
This is a common question many expats ask because U.S. tax liability overseas is a tricky topic. Factually, the U.S. is one of two countries that tax their citizens regardless of where they live in the world. Yet, the good news is Americans abroad most likely won’t be double-taxed due to some cool tax benefits.
Firstly, The Foreign Earned Income Exclusion is an expat tax benefit that allows Americans to exclude up to 107.600 USD of earned foreign-sourced income in 2021. This income must be specifically from sources outside the United States. You need to fulfil some qualifications to be eligible to use this exclusion: you have lived outside the United States for a full 330 days in a consecutive 12-month period that begins or ends in the tax year, or you need to be a registered resident and subject to local income taxes in that foreign country for a full calendar year.
Secondly, the Foreign Tax Credit is a dollar-for-dollar reduction towards foreign income as an American abroad. For example, if you paid 200 Euros to the Dutch government, you can take a 230 (based on the exchange rate) U.S. dollar credit against any U.S. taxes you may owe. So, you can effectively subtract 230 dollars off your U.S. tax bill.
Thirdly, tax treaties are another way to prevent double taxation. Treaties allow American residents in foreign countries to be taxed at a reduced rate from certain types of income from U.S. sources. In 1992, the U.S. and the Netherlands signed a treaty together to prevent Americans abroad from being double-taxed. In 2004, a protocol was added in the treaty that covered dividends, sharing tax info between the countries, and other certain types of income.
3. When do I have to file U.S. taxes?
Did you know expats receive an automatic 2-month extension to file a tax return? Yup, it’s not like in the States where you have to file by April 15. In fact, June 15 is the common U.S. tax filing deadline for Americans abroad. Last year, however, the IRS pushed the date even further, to July 15, due to the unprecedented coronavirus situation. Yet, we are certain the June 15 deadline will stay this year.
4. What is the FBAR, and do I have to file that?
The Report of Foreign Bank and Financial Accounts is something an expat needs to fill out if they have had more than 10.000 USD from all of their foreign financial accounts combined at any one time during the year. This includes accounts you have signature authority over (i.e., business accounts). This means that if you’ve had 10.002 USD in your foreign bank account, you’ll need to file an FBAR to the US Treasury. The FBAR should be filed before the October 15 deadline.
5. How often can expats travel to the U.S. before they owe taxes?
While travelling to the U.S. to see family and friends is wonderful, travelling too much can, unfortunately, make you unable to claim the Foreign Earned Income Exclusion. Why? Because you could fail the physical presence test, which is about living outside the U.S. for 330 days during the year. Due to the pandemic, there are special circumstances where increased U.S. presence will not automatically disqualify you for FEIE.
6. Will I get in trouble if I don’t file U.S. taxes?
With evolving technology, the IRS is finding ways to track U.S. expats if they haven’t been filing or paying their taxes. While we’re not here to scare you, we want to emphasise the importance of being tax compliant. Otherwise, you may get some unwelcome penalties: think 10.000 USD or more. It’s rare, however, we have seen it happen. So, if you haven’t been filing your U.S. tax returns and haven’t received a notice from the IRS yet, you’re ok. You can take advantage of the Streamlined Procedure, which allows qualified taxpayers to make up to four years of tax returns and six years of FBARS in a couple of hours.
7. How can I get my stimulus checks?
Stimulus checks are meant to halt U.S. economic damage and provide monetary support for families during the coronavirus pandemic. To have received the 2020 stimulus check, expats need to have filed a 2018 / 2019 tax return (or register via the Non-Filer IRS portal) with info on where to send the check. These checks were around 1200 USD or more, depending on each citizen’s income levels and family situation.
In 2021, the second batch of stimulus checks has been released, though at a much lower price of 600 USD (talks for a higher third batch are already underway!). Americans abroad could receive this check via direct deposit if their bank details were on the last tax return. Another way expats could receive the check is by paper check in the mail.
If for some reason, you didn’t qualify for the first round of stimulus payments as an American abroad last year or you did not apply for them, you may be able to claim the full amounts this year. The value of each stimulus check is calculated based on your previous years’ tax returns. Thus, some expats weren’t eligible to receive the check. However, expats can have their eligibility re-evaluated this year, based on their 2020 income and whether it’s below the adjusted gross income threshold that allows them to get a check.
Please note, all expats must file a 2020 tax return, even if they don’t need to in order to claim the Stimulus Checks.
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