Many Americans are surprised (and frustrated) that even though they are resident in another country, they are still subject to filing tax returns with the IRS.

If you are a U.S. citizen or resident alien, your worldwide income is generally subject to U.S. income tax, regardless of where you are living. Also, you are subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States.

Expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. ¹

This doesn’t necessarily mean you will owe taxes, as there are agreements in place with some other countries like the UK that prevents double taxation. It can get complicated and it is a burden to comply.

American Expat Tax Basics

For expats in the UK, the UK income tax year does not align with the US tax year, so we are required to keep or make additional records and calculations, in addition to converting £ Great British Pound (Sterling) More to USD. For American expats, the tax return due date is extended from April 15th to June 15th.  However, the extension does not apply to payment of any tax due.

Your tax returns must be filed using USD, which means you’ll have some exchange rates to deal with. Typically you should record the exchange rate for the day you’re paid, and it’s simple to look up historic exchange rates. For some calculations, you can use the IRS average exchange rates for the tax year. ² I find it easiest to use a simple spreadsheet.

US Expat Tax Exemptions

There is an exempt amount of foreign income that can be earned without worrying about being taxed, if you have established residency abroad for a year. The IRS sets the maximum foreign earned income exclusion (Foreign Earned Income Exclusion (US Tax) More) and it is adjusted annually for inflation. For example, in 2022, the maximum exclusion has increased to $112,000. This is roughly the equivalent of £85,000. (In 2016, it was $101,300.) xxx

If you have made less than the exclusion, you are not taxed on this amount. Note that Self-Employment Income is treated differently. However, there are physical presence tests to determine eligibility for this exemption based on residency, along with a foreign housing deduction. If you have not yet qualified for for the FEIE, you may still qualify for A deduction of foreign income taxes to reduce U.S. taxable income. More, where income taxes you’ve paid abroad are deducted from the tax that you’d owe. However, you cannot double dip and use both.

FBAR

FBAR is a requirement for reporting bank accounts that have had more than $10,000 total accounts balance at any point during the year. FBAR filing must be done electronically via FinCEN Form 114, separately with the US Treasury Department. Penalties for failing to file FBAR can be steep— $10,000 per instance.

FATCA

If you have specified foreign financial assets whose total exceed certain thresholds, $200,000 or more, you will be required to file Foreign Account Tax Compliance Act (USA) More Statement of Specified Foreign Financial Assets (FATCA, US Tax) More with your tax return.

How to File a US Expat Tax Return

If you have straightforward returns, you can e-file with the IRS.

If you need to use postal mail, you must use special addresses below. From the IRS:

If any of the following situations apply to you, do not file your return with the service center listed for your home state.

 

• You claim the foreign earned income exclusion.
• You claim the foreign housing exclusion or deduction.
• You live in a foreign country.

Instead, use one of the following special addresses.

If you are not enclosing a check or money order, file your return with:

Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215 USA

 

If you are enclosing a check or money order, file your return with:
Internal Revenue Service
P.O. Box 1303
Charlotte, NC 28201-1303 USA ³

 If you do not have a simple tax return, or it’s all just overwhelming, you may wish to opt for an expat tax specialist.

References

1. Publication 54 (2022), Tax Guide for U.S. Citizens and Resident Aliens Abroad | Internal Revenue Service. (2023). Retrieved 5 August 2023, from https://www.irs.gov/publications/p54

2. Yearly Average Currency Exchange Rates | Internal Revenue Service. (2023). Retrieved 5 August 2023, from https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates 

3. Publication 54 (2022), Tax Guide for U.S. Citizens and Resident Aliens Abroad | Internal Revenue Service. (2023). Retrieved 5 August 2023, from https://www.irs.gov/publications/p54#en_US_2022_publink100047307