Interesting Tax Rules US Citizens Should Know When Living Abroad

Living Abroad as An American Taxpayer

Even if you are living abroad, you still owe taxes to the U.S. government. Your tax payments are still due April 15 and you still need to track your income. There are credits, deductions, and extra papers you need to file while you live out of the country.

The Foreign Account Tax Compliance Act (FACTA) is an effort to counter American taxpayers committing tax evasion by holding accounts in countries outside the U.S. It requires foreign financial institutions to report accounts held by American taxpayers. The financial institutions include banks, investment companies, insurance companies, brokers, and credit unions.

If you have any questions about reporting taxes to the IRS while you’re abroad for at least 330 days out of the year, call America’s Choice Tax Relief. We’ll be happy to discuss how to remain compliant with the IRS while abroad.

Automatic Two Month Extension

When you live outside the United State of America, you automatically receive a two-month filing extension. Instead of April 15, you may file your taxes by June 15. If you realize you can’t file by June, you may request an extension for October 15. Your first extension is automatically implemented. You don’t have to let the IRS know you’re going to file in June beforehand, but you do have to explain on your tax return why you filed past April 15.

If you can’t make the June due date, you have to manually request an extension to the IRS before June 15 to qualify for the October due date. Remember that interest will accrue on your tax payment even with the two-month extension. The extension is mainly to prevent the IRS from applying penalty fees on your taxes.

Exchange Rates

This is where filing your tax return may be tricky, especially if you’re in a country where the exchange rate is high between the United States and the country you reside in. When you pay and file your taxes, they must be in U.S. dollars. Exchange rates change daily. It’s important to note that the exchange rate the IRS uses to convert into the U.S. dollar is based on the date the bank processes the payment, not the date the IRS receives payment.

Form 8928 and FBAR Requirements For Living Abroad

There are two forms you, as an American taxpayer living abroad, will most likely need to complete before you turn in your tax return. You will need to turn in the FBAR, Form 8938, or both. Depending on your situation, you’ll only need to file the FBAR.

The FBAR

The FBAR stands for Foreign Bank and Financial Accounts Report; also known as FinCEN Form 114. While traveling abroad you must absolutely turn in this form by April 15, the day taxes are due. You may also request an extension up to Oct 15. You would send this form to the Financial Crimes Enforcement Network (FinCEN). Any U.S. person including citizen, resident aliens, trusts, etc. that own a financial account that had a balance of over $10,000 outside of the U.S. needs to file an FBAR form. If the total of your accounts reaches $10,000 or more, even for a short period of time, all accounts need to be reported. If you don’t, you will face legal consequences from the IRS. Reports include joint accounts with your spouse, employer accounts, and other accounts that you are attached to. You must also report:
  • Foreign stock or securities held in a financial account at a foreign institution 
  • Foreign life insurance or annuity contract with a cash-value
  • Mutual funds

Form 8938

The Foreign Account Tax Compliance Act (FACTA) is the IRS’ method of mitigating tax fraud for financial accounts or assets outside of the United States. It requires foreign financial institutions to report your assets to the IRS to ensure consistency on your end.

Form 8938 is only applicable to American citizens who meet a certain threshold of income.
Filing Status Last Day of the Year Any Time of the Year
All Single Filers $200,000 $300,000
Married (jointly) $400,000 $600,000
If you do not meet these requirements, you may not need to file Form 8938. You’ll want to locate any stock, investments, partnerships interest, pensions, or hedge funds. Anything that involves your bank account, you’ll want to collect to report. America’s Choice Tax Relief may assist you with your tax preparation to make the process easier for you.

Reportable Foreign Assets

The IRS provides a complete list of reportable assets that would need to be reported for Form 8938 and FinCEN Form 114 (FBAR). 

Open Table

United States Tax Credits and Deductions for Living Abroad

In order to qualify for any foreign tax credits and deductions, you must meet certain requirements. You must have earned foreign earned income that is also subject to USA income tax. Your home must be in a foreign country, and, as an American citizen or resident alien, meet specific residency requirements set by the IRS.

Should you apply foreign tax credits to your taxes, you must apply them to all your taxes. You can’t deduct and credit your taxes. You must choose one or the other. However, there is an exception. You may apply a deduction on foreign taxes if they don’t qualify for credits.

Credits are meant to help you mitigate your taxes from both the United States and the foreign country you reside in. The IRS advises that “it’s better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction.”

Benefits to Foreign Tax Credits

Reduces U.S. income Tax

apply foreign tax credit to the standard deduction

Credit Carries Over Next Year

How We Help

America’s Choice Tax determines what processes are right for you. Call us today if you have questions about living abroad. It will affect your taxes so prepare yourself ahead of time to prevent surprises!
Types of Foreign Assets Form 8938, Statement of Specified Foreign Financial Assets FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
Financial (Deposit and Custodial) accounts held at foreign financial institutions Yes Yes
Financial account held at a foreign branch of a U.S. financial institution No Yes
Financial account held at a U.S. branch of a foreign financial institution No No
Foreign financial account for which you have signature authority No, unless you otherwise have an interest in the account as described above Yes, subject to exceptions
Foreign stock or securities held in a financial account at a foreign financial institution The account itself is subject to reporting, but the contents of the account do not have to be separately reported The account itself is subject to reporting, but the contents of the account
Foreign stock or securities not held in a financial account Yes No
Foreign Partnership interests Yes No
Indirect interests in foreign financial assets through an entity No Yes, if sufficient ownership or beneficial interest (I.e., a greater than 50% interest) in the entity. See instructions for further detail
Foreign mutual funds Yes Yes
Domestic mutual fund investing in foreign stocks and securities No No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor Yes, as to both foreign accounts and foreign non-account investment assets Yes, to foreign accounts
Foreign-issued life insurance or annuity contract with cash-value Yes Yes
Foreign hedge funds and foreign private equity funds Yes No
Foreign real estate held directly No No
Foreign real estate held through a foreign entity No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate No
Foreign currency held directly No No
Precious metals held directly No No
Personal property, held directly, such as art, antiques, jewelry, cars, and other collectibles No No
‘Social Security’ - type program benefits provided by a foreign government No No

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