What Americans Need to Know About Their US Taxes When Moving Abroad
Even while living abroad, as a US citizen you will be obligated to file taxes to the IRS. Before you move, make sure you are acquainted with the filing process.
To move abroad and leave the US can be a life-changing decision and is of course a big step. To make this step happen, a lot of things need to be considered before you are actually settled in your host country. How should you apply for a visa? What about the visas of your family? How can you apply for rental property abroad? A lot of things need to be arranged locally, but for US citizens there is an extra requirement to consider which is often forgotten by US expats. This could result in an annoying administrative burden and a risk of being audited by the IRS. This article outlines why you should file, what to consider and how to file.
Specific IRS forms for Americans abroad
When you as a US citizen live abroad, all your foreign income should be reported on your form 1040 as usual. As you most likely also pay tax locally, form 1116 and form 2555 make it possible to reduce your US tax bill by claiming the Foreign Tax Credit or the Foreign Earned Income Exclusion.
Different tax terminology
The tax terminology is very different from how it is in the US. Form 1116 and form 2555 use Foreign Tax Credit, Foreign Earned Income Exclusion, Foreign Housing Exclusion, Physical Presence tests and many more. This does not make it easy to easily understand your return.
Tax software not supporting the expat forms
Most tax software providers do not support these specific forms as they are not specifically designed for the expat market, but more for the US domestic market. Even if the forms are supported, it is still difficult to complete as the tax terminology is different. However, there is some DIY US expat tax software designed specifically for the US expat market that can aid in quickly e-filing US tax returns with the IRS platform.
Tax professionals not familiar with form 1116 and 2555
There is a good chance that your trusted tax professional is not familiar with the forms 1116 and form 2555 as they are specifically for Americans abroad.
How to file from abroad
These are the options you have as a US expat:
- Do it yourself and fill the forms 1116 and/or 2555 yourself.
- Use DIY software.
- Hire a US expat tax professional. This can easily cost you $500 or even more.
Clearly, you need to file your US taxes when living abroad. This is often forgotten and could result in unwanted hassle which you really just don’t want. A lot of Americans will owe no taxes, but still have the obligation to file. Just file, it is not that difficult to get your US taxes filed!
Also expect that these forms will be new to you and that different terminology will be used from that which you are used to. These new forms 1116 and form 2555 are often not supported by tax software and you should check whether your trusted tax professional is able to complete these forms.
When you have plans to move abroad, just research the options to make sure you pick the right fit to file your US taxes.