Living abroad as a U.S. citizen or green card holder offers exciting opportunities for personal and professional growth. However, it also comes with the responsibility of navigating U.S. tax laws, which can be a complicated and sometimes overwhelming task for expats and dual citizens. While the U.S. tax system operates on a citizenship-based taxation model, meaning U.S. citizens are required to file taxes regardless of where they live, many expats are unaware of the intricacies involved in filing their U.S. tax returns from abroad.
TMP Corp’s Cross-Border Tax Accountants specialize in helping U.S. and international businesses navigate multi-jurisdictional tax compliance with confidence.
In this article, we’ll explore the most common mistakes U.S. expats and dual citizens make when filing taxes while living abroad and provide guidance on how to stay compliant and minimize tax liabilities. If you’re a global nomad, a U.S. citizen living overseas, or a dual citizen with U.S. ties, understanding these pitfalls is essential for avoiding unnecessary penalties and ensuring a smooth tax filing process.
1. Failing to File on Time
One of the most common mistakes expats make is failing to file their taxes on time. While U.S. citizens and green card holders living abroad are granted an automatic two-month extension (until June 15th) to file their tax returns, this extension does not apply to the payment of taxes due. If you owe taxes, you are still responsible for paying by April 15th—otherwise, you may incur penalties and interest.
What to do:
- If you need more time to file your return, you can request a further extension by filing IRS Form 4868, which extends the deadline to October 15th.
- Be aware: The extension only applies to the filing deadline, not the payment deadline. If you owe taxes, it’s important to estimate the amount and pay by April 15th to avoid penalties.
2. Overlooking Foreign Income Reporting Requirements
U.S. tax laws require that all worldwide income be reported, regardless of where it’s earned. This means that if you earn income while living abroad, it must be declared on your Form 1040.
Many expats overlook certain forms and reporting requirements for foreign income, such as:
- Foreign Bank Account Reporting (FBAR): If you have $10,000 or more in aggregate in foreign bank accounts at any point during the year, you must file FinCEN Form 114 (FBAR).
- Foreign Income and Deductions: Failing to report foreign earnings, rental income, or foreign tax deductions can result in fines or penalties. U.S. expats can also claim Foreign Earned Income Exclusion (FEIE) (Form 2555) or a Foreign Tax Credit (FTC) (Form 1116) to reduce their U.S. tax liability.
What to do:
- Ensure all foreign income is reported, including income from foreign jobs, businesses, investments, or rental properties.
- Keep detailed records of your foreign bank accounts and file the FBAR if applicable.
- Consider consulting a cross-border tax expert to determine whether the Foreign Earned Income Exclusion or Foreign Tax Credit applies to your situation.
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3. Ignoring the Foreign Tax Credit or Exclusion
One of the key benefits available to U.S. expats is the Foreign Tax Credit (FTC) or Foreign Earned Income Exclusion (FEIE). These provisions are designed to reduce or eliminate double taxation—meaning the taxes you pay to your host country can be credited against the taxes owed to the U.S. government. However, many expats fail to take advantage of these options, either because they don’t know about them or because they don’t properly claim them.
What to do:
- If you’re living in a country with income tax, ensure you claim the Foreign Tax Credit (Form 1116) to offset taxes you’ve paid to a foreign government.
- If you meet the criteria for the Foreign Earned Income Exclusion (Form 2555), you can exclude up to $108,700 (for 2021) of your foreign-earned income from U.S. tax.
These benefits can significantly reduce your U.S. tax liability, so it’s essential to correctly file these forms.
4. Not Reporting Foreign Investments
If you own foreign assets, such as stocks, bonds, mutual funds, or real estate, these must be reported to the IRS under various forms, including:
- Form 8938 (Statement of Specified Foreign Financial Assets): Required if you have foreign assets that exceed certain thresholds.
- Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company): Necessary if you hold shares in a Passive Foreign Investment Company (PFIC).
Failing to report foreign investments correctly can result in significant penalties.
What to do:
- Review all foreign assets and ensure they’re reported on the appropriate forms (Form 8938 and Form 8621).
- Work with a tax professional to ensure compliance, especially if you have complex foreign investment portfolios.
5. Not Accounting for Foreign Social Security Contributions
If you’re employed abroad or self-employed, you may also be contributing to a foreign country’s social security system. U.S. expats can often claim a foreign social security credit to avoid paying double into both the U.S. Social Security system and the foreign system. However, this requires careful reporting to the IRS.
What to do:
- If you’re paying into a foreign social security system, check whether the totalization agreement between the U.S. and your host country allows you to avoid double contributions.
- Ensure that the foreign social security taxes are correctly accounted for when filing your U.S. tax return.
6. Not Understanding State Tax Obligations
While federal tax filing is required for all U.S. citizens and green card holders, some states may have their own tax rules that apply to residents living abroad. Certain states, like California and New York, may still require you to file a state return even if you live abroad. Other states may have a state income tax that applies to foreign income or a state exit tax if you’ve moved abroad permanently.
What to do:
- Verify whether your state of residence has specific tax filing obligations for expats.
- Be aware of state exit taxes and ensure proper documentation if you plan to relinquish your U.S. residency.
How TMP Corp Can Help U.S. Expats and Dual Citizens
At TMP Corp, we specialize in helping U.S. expats, green card holders, and dual citizens navigate the complexities of U.S. tax filing while living abroad. Here’s how we can support you:
- Cross-Border Tax Expertise: We ensure that your filing complies with both U.S. and foreign tax laws, helping you take full advantage of Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit (FTC), and other available deductions.
- Filing FBAR and FATCA Forms: We guide you through the process of filing FBAR (FinCEN Form 114) and FATCA (Form 8938), ensuring that all foreign bank accounts and financial assets are reported.
- State-Level Compliance: TMP Corp ensures you stay compliant with both federal and state tax obligations, no matter where you live.
- Ongoing Support: From tax planning and filing extensions to ensuring that your global investments and income sources are properly accounted for, TMP Corp offers comprehensive, year-round support.
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Stay Compliant and Minimize Tax Exposure with TMP Corp
Filing U.S. taxes while living abroad as an expat or dual citizen can be a complex process, but understanding common mistakes and knowing how to avoid them can save you from penalties and fines. By ensuring you meet all filing requirements—whether for foreign income, state taxes, or foreign social security contributions—you’ll avoid costly errors and remain compliant with U.S. tax laws.
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At TMP Corp, we specialize in helping U.S. expats and dual citizens navigate the intricacies of cross-border tax filing. Let us guide you through the process and ensure your financial future is secure and compliant with both U.S. and international tax regulations. Contact us today to learn more!
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