Tax time isn’t something most people look forward to. If you do your own taxes, you need to gather your receipts, complete paperwork, read up on new rules to the tax code and ask a several questions to make sure you are following the letter of the law. Even if you use an experienced, professional tax preparer, you’re likely to be filled with anxiety over the process and worried about the bottom line.
For the nearly 9 million Americans living abroad as expats today, tax time can be twice as complicated and even more frustrating. These American citizens living abroad often need to navigate an unfamiliar country’s tax code as they attempt to keep as much as their hard-earned money in their pockets as they can. To help alleviate some of the stress that seems to go hand-in-hand with tax time, here’s the top three things you need to know about filing taxes abroad as a United States citizen.
You still need to file an American tax form
Unless you denounce your American citizenship, Uncle Sam needs you to continue filing American tax forms. That’s because in the U.S., taxes are based on citizenship, not residency.
So, no matter where you live in this great big world, according to the Internal Revenue Service (IRS), you are subject to tax on worldwide income from all sources and must report all taxable income and pay taxes in a timely fashion.
Even if you have a foreign financial account in a local bank abroad that doesn’t generate any taxable revenue, this must be reported to the IRS in a separate filing.
It’s easy to see with all this red tape and legal requirements why tax time can be such a headache for expats, but there is a bit of good news to share.
You have more time to file your taxes
The IRS recognizes that expats may need additional time to get their financial house in order, so any U.S. citizen or resident alien residing overseas as well as American citizens serving in the military who are on duty outside the U.S., receives an automatic two-month extension through June 15 to file their return.
However, your tax liability remains the same and any tax owed must be paid by the traditional tax deadline of April 15 (unless this date falls on a holiday or weekend) or interest will be charged.
If you still need more time, expats generally qualify for an extension through Oct. 15 upon request.
You can claim the Foreign Earned Income Exclusion or Foreign Tax Credit
Even more good news: Thanks to income caps and special tax credits and other programs like the Foreign Earned Income Exclusion and Foreign Tax Credit, most expats ultimately aren’t required to pay American taxes at all. These tax exemptions are designed so expats can claim the taxes paid in the country they currently live in, so they are not double taxed on the same income.