Navigating the complexities of US taxes while living abroad can be overwhelming. Many expats unintentionally make mistakes that can lead to hefty fines, interest charges, or even legal issues. Here are some of the most common tax mistakes US expats make—and how to avoid them.
1. Not Filing a Tax Return
One of the biggest misconceptions is that living abroad exempts you from filing US taxes. In reality, US citizens and resident aliens must report their worldwide income annually, regardless of where they live. Failing to file can result in penalties and loss of eligibility for exclusions or credits.
Tip: Always check if you meet the filing requirements for your federal tax return, even if you expect to owe nothing due to exclusions.
2. Not Filing the Foreign Bank Account Report (FBAR)
If your foreign account balances exceed an aggregate maximum balance of $10,000 at any point during the year, you must file FinCEN Form 114 (FBAR). Failing to file can result in severe penalties, ranging from $10,000 per violation (non-wilful).
Tip: Keep detailed records of your foreign accounts and ensure you meet the filing deadline, usually April 15th, with an automatic extension to October 15th.
3. Misunderstanding the Foreign Earned Income Exclusion (FEIE)
The FEIE allows you to exclude up to around $126,500 (in 2024) of foreign-earned income (adjusted annually). However, many expats mistakenly assume they automatically qualify. To claim the exclusion, you must meet either the Physical Presence Test or the Bona Fide Residence Test and file Form 2555.
Tip: Carefully track your residency or presence abroad to ensure you meet the qualifications.
4. Not Claiming the Foreign Tax Credit (FTC)
If you pay foreign income taxes, you may be able to reduce your US tax liability by claiming the Foreign Tax Credit using Form 1116. Failing to claim this credit can result in paying more tax than necessary.
Tip: Weigh the benefits of the FEIE versus the FTC to determine which provides the most tax savings.
5. Forgetting About Self-Employment Tax
Expats who work for themselves are subject to self-employment tax (Social Security and Medicare) even if they live abroad. This can come as a surprise, especially if your host country also taxes self-employment income. However, there might be an exclusion from such taxes depending on the taxpayers country of residence under the double income tax treaty.
Tip: Pay estimated taxes quarterly using Form 1040-ES to avoid underpayment penalties.
6. Missing Deadlines and Extensions
Expats receive an automatic two-month extension to June 15th, but tax payments are still due on April 15th. You can request a further extension for filing to October 15th by submitting Form 4868. Missing deadlines can result in interest charges and late filing penalties.
Tip: Mark key dates on your calendar and set reminders to file on time.
7. Not Reporting Foreign Investments
Owning shares in foreign corporations, foreign mutual funds, or foreign trusts may require additional reporting on forms like Form 8938 (FATCA), Form 8621, and Form 3520. Failing to file can lead to steep penalties.
Tip: Seek guidance if you have foreign investments to ensure compliance.
Final Thoughts
US expats must navigate a unique set of tax obligations that can be challenging to understand. Avoiding these common mistakes requires awareness, careful planning, and sometimes professional assistance.
The information in this blog post is for general informational purposes only and does not constitute professional tax advice. We strongly recommend consulting a qualified tax professional before making any decisions. US Expat Tax Advisor is not liable for any actions taken based on this content.
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