Living outside the United States doesn’t mean you’ve escaped the IRS. Here is what US expats and NRIs need to know about their filing obligations.

Moving abroad is an exciting adventure. You have a new culture to navigate, perhaps a new language to learn, and a new home to settle into. However, amidst the excitement of international living, there is one stubborn reality that follows you anywhere on the globe: your US tax obligation.

Unlike almost every other country on Earth, the United States taxes based on citizenship, not residence.

This means that if you are a US Citizen or a Green Card holder, the IRS expects a tax return every year, regardless of whether you live in London, Tokyo, or Hyderabad, and regardless of where your income is earned.

For many of our international clients at Nine Tax Filer, this comes as an unpleasant shock. Here is a breakdown of the essential concepts you need to understand.

1. The Universal Filing Requirement

It bears repeating: If your gross worldwide income meets the minimum filing threshold, you must file a US Form 1040. It doesn’t matter if your salary was paid in Euros or Yen into a foreign bank; it is reportable to the IRS.

2. Reducing Double Taxation: The FEIE and FTC

The good news is that you likely won’t end up paying double taxes, thanks to two mechanisms designed to protect expats:

• The Foreign Earned Income Exclusion (FEIE): This allows qualifying Americans living abroad to exclude a significant portion of their foreign earnings from US tax (over $120,000 for the 2023 tax year, adjusted annually for inflation).

• The Foreign Tax Credit (FTC): Alternatively, you can claim a credit against your US tax bill for income taxes paid to a foreign government.

Choosing between the FEIE and the FTC requires strategic planning, as one is often more beneficial depending on the tax rate of your host country.

3. The Hidden Traps: FBAR and FATCA

This is where many expats get into trouble. It’s not just about income tax; it’s about financial disclosure.

• FBAR (Foreign Bank and Financial Accounts Report): If the aggregate value of your foreign financial accounts exceeded $10,000 at any single point during the calendar year, you must file FinCEN Form 114. This is separate from your tax return, and the penalties for failing to file are severe.

• FATCA (Foreign Account Tax Compliance Act): This usually involves filing Form 8938 with your tax return if your foreign assets exceed certain, higher thresholds.

4. The Deadlines Are Different

While domestic taxpayers face an April deadline, expats living abroad on that date get an automatic two-month extension to June 15th to file their return. However, if you owe taxes, interest still starts accruing from the April deadline.

Don’t Navigate International Taxes Alone International tax law is perhaps the most complex area of the US tax code. A simple DIY software package is rarely equipped to handle the nuances of foreign tax credits, FBAR compliance, and treaty positions.

If you are living abroad, you need a partner who understands the global landscape. Nine Tax Filer specializes in helping expats stay compliant and maximize their exclusions. Let us handle the paperwork while you enjoy your life abroad.