US Expats and Taxes

New information!

Recently a new law was passed by the US Congress which has changed the tax liabilities of some US expats, especially those who get housing allowances. Those of us who do not get housing allowances will see our exempt income rise from $80,000 to $82,400, but the law has changed the way this is calculated. A bit more information and some examples are here and here, from the International Herald Tribune. When I get more information I shall post it on this site.

One thing to remember is that if you live in a high-tax jurisdiction (most of Europe, Australia, for example) you're unlikely to be worse off from this law. Those who live in low-tax jurisdictions such as Saudi Arabia and Singapore will see a bigger bite out of their incomes.

I often get questions about the tax liabilities of someone with dual U.S./U.K. citizenship. In short, U.S. law states that every U.S. citizen or resident alien, wherever s/he lives, is required to file a U.S. income tax return. Fortunately, U.S. law also states that, for a citizen or resident alien (that is, a Green Card holder) who is legally resident for tax purposes in another jurisdiction, a certain amount of their income is exempted from U.S. tax liability. The definition of being "tax domiciled" in another country is somewhat complex, and you should look at your tax instruction book under the instruction for Form 2555. For the 2006 tax year, this exemption will be $82,400. It will in future be indexed to U.S. inflation levels. You may make as salary an amount up to the specified income level without having to pay any U.S. tax on that income. I do not yet make this much, thus I haven't paid any U.S. taxes since the 1994 tax year. However, I have filed a return each year.

file a return, you say?

Yes, you must file a return each year. The U.S. government by law taxes its citizens wherever they live, sharing this characteristic only with the Philippines. The exemption is large enough so that the only U.S. expats who need to pay taxes are those who are more than merely middle-class.

but my employer doesn't even know what a w-2 form is!

That's not a problem. The IRS does not require a W-2 form for income earned overseas. When I called the IRS office here in the U.S. Embassy in London, they said, "Don't worry about it--we trust you." I was flabbergasted. The IRS does require you to enter your income in US$ rather than in the local currency. This could be a problem for some if they don't have records of the exchange rate. I have solved this problem for myself--here's what I've done.

First, I subscribe to the Universal Currency Converter e-mail service. Find out more information about them here. This service sends you an e-mail each day listing the exchange rates for various currencies against a base currency you specify. I specify the pound sterling as my base currency, so I have a continuous record of exchange rates. I save these e-mails for use later on in the year, when the tax forms are due. I have recently been told that the IRS website has links to currency converters that can give the exchange rate for sterling (and other currencies) for any day in the past several years. So there are a multitude of ways of finding out the exchange rate.

Second, I have set up an Excel spreadsheet into which I have entered each month's salary in its own cell. Above that cell, I enter the exchange rate which prevailed on the day on which I got paid. I look at last year's Universal Currency Converter e-mails for my pay dates to find this figure. Below it, I do a calculation which gives me the US$ amount of my salary for that month. I then sum up these 12 cells to get my yearly income in US$. This is what you enter on line 7 of the 1040 form. Note that the salary figures given below are not my actual salary figures.

My total salary for these three months, therefore, would have been $20,550.1121, which rounds to $20,550. Since banks in the U.K. normally give interest on your current account (=U.S. checking account) balance, I have cells for those amounts as well which are also summed up and entered on line 8a.

Once you have done this, you must fill out either form 2555 or 2555-EZ, which calculates for you the correct amount of exempt income. This is entered on Form 1040, line 21 and subtracted from your gross income. If your tax domicile has been abroad for the entire year, this amount should be 100% of your gross income and cancels it out.

filing your return

It takes me about an hour to enter the amounts and check that they are correct, and file my return. I did it one day after I received it. However, if you need it, your presence outside the U.S. on April 15th means that you have an automatic 2-month extension. But, if it's this easy, why wait? Get it in early.

what happens if you haven't filed while an expat?

I have several friends and acquaintances who are in this boat as they were unaware of the obligation to file. There are criminal penalties for not filing a tax return when that is required by law, and these penalties apply to all U.S. citizens and resident aliens wherever they reside.

In addition, there is a requirement in law that all U.S. citizens possess a valid U.S. passport when outside the country. A U.S. citizen is prohibited from entering or leaving the U.S. on a foreign passport (if they are entitled to one). There is an "administrative fee" of $100 for U.S. citizens not in possession of a valid passport who attempt to enter the U.S. The kicker is this: when you go to your U.S. Embassy or Consulate in your country of residence to renew your passport, the consulate staff check your name and Social Security number with the Internal Revenue Service. If you have not filed tax returns in the past, your passport may not be renewed until you do file. Thus, you won't be able easily to re-enter the U.S., even if you are a dual citizen with a valid passport from your second country of citizenship.

Another fact that expats often don't remember when neglecting to file their overseas tax returns is that someday they may actually want to move back to the United States for whatever reason--family or retirement or even work reasons. Once you've moved back to the U.S., and begin filing tax returns again, the IRS will begin to wonder where you've been all these years. You'll have to explain then, and probably have to file the overdue returns anyway. Why not do it when they're due and save yourself the trouble of reconstructing your financial affairs later on?

For most of us, there is no tax liability when earning money as an expat. However, in your first year of expatriation, you will probably be due a refund for the part of the year spent working and living in the U.S. So you should file anyway to get your tax refund. After that, you will get a packet from the IRS each year with your forms and instructions. If it's lost in the post, go to the IRS website and download some new ones, or go to your local U.S. Embassy or consulate.

While I am not certain of this, I suspect that, since you won't (in most cases) be subject to tax while an expat, if you 'fess up to the IRS and file retrospective tax returns for the missing years, your liability will be limited or nil. Remember: I'm not a lawyer and if you are in this situation, you must consult a lawyer who is skilled in U.S. tax law before doing anything.

some expats who do have to pay taxes

I have recently found that some expats do have to pay taxes, even though they do not actually make a lot of money. Some of these are self-employed people. When they do not have an employer, people generally have to file and pay the alternative minimum tax; this may prove to be a liability for some people overseas. In addition, there may be social security tax to pay to the United States if there is no reciprocity treaty between the United States and the country in which you are working. I am not a lawyer! If you feel you may be in this situation, consult a lawyer who is skilled in this situation.

if i have to file a tax return, i'd rather renounce my u.s. citizenship!

To be frank, I suppose I could have renounced my U.S. citizenship when I became a British citizen. However, my only civic duties to the U.S. now are voting and filing my tax returns. These are not really onerous duties. However, some people feel very put upon when they find they must file U.S. tax returns even though they don't owe any taxes. Beware of renouncing your citizenship.

1. It's an irrevocable choice. You may not ask for your citizenship back unless you can prove that you were coerced into renouncing it in the first place. This might be very difficult to prove.

2. You will have difficulties when travelling back to the U.S. Your new passport will show your place of birth (mine is "Massachusetts" in my British passport). The immigration agent will see that and ask you why you are travelling on a non-U.S. passport. You will then explain you've renounced your citizenship and may have to prove it by carrying the certificate of renunciation you received from the U.S. Embassy/Consulate at which you performed the renunciation. This will take time and may result in delay. I would also expect that some immigration agents, being human and being Americans, might not be disposed to be very nice to someone who has renounced American citizenship.

3. If you do owe U.S. taxes because your income is fairly high, even if you renounce your U.S. citizenship you may still be subject to U.S. taxes for ten years after you have renounced citizenship. This is according to a law which took effect from 1995, designed to make it more costly for people who were going abroad, taking foreign citizenships, and then renouncing their U.S. citizenship solely to avoid U.S. taxes.

Any comments? Want to discuss taxes for U.S. expats?

(c) 2000-2006 Chris Hansen

Had enough? Click on the arrow to the right to go back to the home page.

 
Top of page