Working and Living Abroad | Tax FAQs
Information for Tax Year 2023
Taxes can be confusing, especially if you live abroad. This post will address taxpayers who live and work abroad, either for a U.S. company or a foreign company. It does not include rules for military, U.S. government personnel, or self-employed individuals.
Who Needs to File Taxes?
Generally, if you are a U.S. citizen or resident alien, then you are subject to the same tax rules and filing requirements even if you are living and working in another country. If you earn more than the standard deduction based on your filing status, you must file a U.S. tax return.
When is the Deadline to File?
Taxpayers whose tax home and abode are outside the United States and Puerto Rico normally get an automatic two-month filing extension, which typically is on June 15. However, if you owe, you must pay by the regular tax deadline, April 15, or you will accrue interest.
Credits and Exclusions
Luckily, those living abroad may be able to claim credits or exclusions that will lower or eliminate tax liability and avoid double taxation. However, you must still file a tax return even if you don't have to pay U.S. tax and you cannot take both the exclusion and credit on the same income.
Foreign Earned Income Exclusion
Foreign earned income includes wages, salaries, professional fees, or other amounts received from a foreign company and income you receive from a U.S. company that has offices abroad.
The foreign earned income exclusion allows U.S. citizens and resident aliens to exclude up to $120,000 for 2023 on their tax return. This amount is adjusted annually for inflation. You may also qualify for the foreign housing exclusion, which allows you to deduct certain living expenses from your taxable income while living abroad. To qualify for these benefits:
You must have foreign earned income
Your tax home must be in a foreign country
You must be a bona fide resident for an uninterrupted period that includes an entire tax year; or
Be physically present in a foreign country (or countries) for at least 330 full days during any period of 12 consecutive months.
Please note that there are exceptions to the bona fide resident and physical presence tests. If you qualify for these exclusions, then you must file a Form 2555, Foreign Earned Income to claim them. The tax on any remaining non-excluded income can be figured using the tax rate that would be applied if you didn't claim the exclusions.
Foreign Tax Credit
If you are taxed on the same income both by the U.S. and a foreign country, you may be able to take a credit or itemized deduction for those taxes. If taken as a deduction, it reduces your U.S. taxable income. If taken as a credit, it reduces your U.S. tax liability. The IRS has a general four-part test that must be met for any foreign tax to qualify for the credit:
The tax must be imposed on you
You must have paid or accrued the tax
The tax must be the legal and actual foreign tax liability
The tax must be an income tax (or in lieu of an income tax)
If your foreign tax meets all of the above qualifications, you will need to file a Form 116, Foreign Tax Credit (Individual, Estate, or Trust). Here's a reminder that if you exclude foreign earned income or foreign housing costs, you cannot take this credit for taxes on the income you exclude.
Reporting Foreign Earned Income
All income must be reported in U.S. dollars, regardless if you were paid in a foreign currency. You can find foreign currency and currency exchange rates on the IRS website.
Foreign Accounts and Assets
If you have a foreign bank, trust, or securities account, then you must attach a Schedule B to your tax return. This is where you will report which countries you have a bank account in.
A Form 114, Report of Foreign Bank and Financial Accounts (FBAR) must be filed electronically with the Treasury Department of Financial Crimes Enforcement Network (FinCen) if you have an interest in, or signature or other authority over foreign financial accounts whose total amount exceeds $10,000 at any time during the year.
Filing Your Tax Return
You will have similar options filing abroad as you do if you were in the U.S:
Work with one of our tax professionals here at Northside Tax Service using our remote tax prep option
E-file your tax return abroad using online software
Mail your U.S. tax return to the IRS
When in doubt, talk to a professional. We have tax preparers with years of experience working with foreign earned income. We can help you determine which exclusions and deductions you qualify for and file an accurate and complete tax return. If you need help filing, feel free to contact us here or give us a call at (360) 922-0235.
Disclaimer: This material is prepared for informational purposes only, and is not tax advice. Please speak with a tax professional or visit the additional resources below to see how this information may apply to you.
