Living abroad is an adventure and a privilege, but Americans living overseas, whether as a long-term settled expat or as a nomadic remote worker, still have to file US taxes.
If you’re an American who has settled in (or who spends significant amounts of time in) another country, you may have foreign tax obligations, too. Regardless, as an American, you always have to file a US tax return every year, reporting your worldwide income.
Filing tips for Americans living abroad in 2022
Americans living overseas in 2022 have until June 15 to file. However, if they owe any US tax, they must pay an estimated amount by April 18 2022 (as April 15 is a holiday in DC this year). It’s also possible to request a further filing extension until October 17 (October 15 falls on a Saturday) by submitting IRS Form 4868 online.
As long as they file, most Americans abroad won’t owe any US tax (read on to find out more). The exceptions are some self-employed Americans and some higher earners, normally depending on what country you live in.
1. File on time to avoid penalties
The most important money-saving tax strategy for American expats in 2022 is to ensure you avoid penalties by filing.
If you don’t file, the IRS assumes you owe US tax on your worldwide income, even if you’ve paid foreign income taxes on it, and the IRS can access foreign tax information as well as your banking information from both US and foreign banks, due to international information-sharing agreements.
If you have foreign bank (or other financial, such as investment or pension) accounts, then you may have to report them by filing a Foreign Bank Account Report (FBAR). Penalties for not filing FBARs start at USD 10,000, so it’s important to file if you're obligated.
If you’ve been living abroad but not filing, you may be able to catch up without facing any penalties with an IRS amnesty programme called the Streamlined Procedure.
2. Make sure you apply for all relevant credits
Most expats find that they are eligible for at least one or more tax credits, which can save a significant amount of money. This includes:
Foreign Tax Credit
If you pay foreign income taxes in the country where you live or work, then when you file your US tax return, you can file Form 1116 to claim the Foreign Tax Credit to reduce your US tax bill. This lets you claim US tax credits worth the same amount as the foreign taxes you’ve paid. If you live in a country that has higher income tax rates than the US, this will eradicate your US tax bill, and it may give you excess tax credits that can be carried forward, too.
Foreign Earned Income Exclusion
Alternatively, if you reside and work in a country with a lower income tax rate than the US (or if you are a digital nomad and don’t pay foreign income taxes), you can use Form 2555 to claim the Foreign Earned Income Exclusion. This lets you exclude up to USD 108,700 (in 2021) of your earned income from US tax. To qualify, you have to either demonstrate that you intend to establish residency in the long term in another country, or that you spend 330 days or more outside the US in a 365-day period.
Foreign Housing Exclusion
If you claim the Foreign Earned Income Exclusion but earn more than the 2021 limit of USD 108,700 (which will rise to USD 112,000 for the 2022 tax year) and you rent a home abroad, you can exclude a further amount based on your housing rental expenses by claiming the Foreign Housing Exclusion, also on IRS Form 2555.
Child Tax Credit
Expat parents with dependent children who have US social security numbers can claim the US Child Tax Credit.
The Child Tax Credit gives a USD 2,000 tax credit per child. Those who claim this tax credit after having their US tax bill to zero by claiming the Foreign Tax Credit will receive a USD 1,400 refund per child.
The refund doesn’t usually apply if you claim the Foreign Earned Income Exclusion, however. Also, most expats won’t qualify for the higher Child Tax Credit amount announced by President Biden for 2021 tax year as part of COVID support, as it can only be claimed by Americans who have resided in the US for at least six months of the past year.
Social Security Taxes
Self-employed Americans abroad are liable to pay US social security and Medicare taxes on their self-employment income at 15.3 percent. Self-employment taxes can’t be reduced by claiming the Foreign Tax Credit or the Foreign Earned Income Exclusion. The US has signed a tax treaty known as a Totalization Agreement with 30 countries. In countries covered under this agreement, Americans don’t have to pay social security tax to both the US and their current country of residence.
3. Seek advice
The best way to ensure that you are paying as little US tax as possible is to seek advice from an expat tax specialist CPA. They will consider your entire circumstances, and ensure you file in your best interests.
Ashwin Ramesh is a Managing CPA at Bright!Tax, and an expert on US taxes for expats. Bright!Tax is a leading provider of US tax services for the estimated 10 million Americans living abroad. If you have any questions regarding your situation, get in touch.