American expatriates are subject to US income taxes regardless of where they live and where they make their income. Furthermore, there are special requirements and issues to consider when it comes to tax return preparation. Over the next couple of months, we will be addressing some of the tax complexities faced by American expatriates living across the world.
US Taxes – Filing Requirements
In general, individuals with income <$9,750, or married couples filing jointly with income <$19,500 do not need to file (for 2013). However, the filing requirement is completely different for self-employed people. The threshold is a meager $400 in earnings.
Child Tax Credit (reason to file even if you are under the filing requirement)
Many expat families with children <17 years of age should file a return in order to take advantage of the child tax credit. As long as earned income is at least $3,000, there is a good chance you will qualify. Each child is worth up to $1,000 money back from the IRS even if you don’t owe any taxes.
Foreign Earned Income Exclusion and Foreign Tax Credit
Without doubt, the IRS filing requirements cast a wide net. However, many US expats end up not owing taxes because of certain exclusions and credits available to the expat community. The most important of these are the foreign earned income exclusion (FEIE) and foreign tax credit. With the FEIE, up to $97,600 of foreign earned income while living abroad is excludable from federal tax. The $97,600 works in conjunction with other deductions. As a result, one can have more than $100,000 in income, and pay no taxes. For married couples, both of whom are working, the exclusion amount is doubled. In order to qualify for the FEIE, one must meet be either the bona fide residence or physical presence test.
With the foreign tax credit, taxes are paid to a foreign country offset US tax liabilities. The foreign tax credit is normally utilized when one has paid income tax to a country with a higher tax rate than that of the US. For some expats in the Caribbean, the FEIE may be more applicable tool than the foreign tax credit.
Next article: Foreign Financial Account Reporting
This article was written by John Ohe (IRS Enrolled Agent and managing partner at Hola Expat). For more information, visit us: www.HolaExpat.com
Disclaimer: The answers provided in this article are for general information, and should not be construed as personal tax advice. Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved.