You’re a green card holder or a US citizen and you decided to live abroad. If you have personal income such as salary, commissions, pension fund, dividends, inheritance, interest, capital gains, rental property and so on, you may have US tax filing obligations. Even if you left the US many years ago and your income comes from a source outside the US, you may still have tax filing obligations. The same is true even if you are not earning any income but you are married to someone who is.
If your income the previous year was above a certain threshold, what you need to do is to file IRS Form 1040. For tax year 2021 (which you will file this year – 2022) the total yearly income thresholds are as follows:
Under 65 65 or older
- Single and unmarried $12,550 $14,250
- Married and filing jointly $25,100 $27,800
- Married and filing separately $5 $5
- Filing as “Head of household” $18,800 $20,500
- Widow or widower $25,100 $26,450
The abovementioned thresholds pertains to the STANDARD DEDUCTION for each filing category. Under the Tax Cuts and Jobs Act which was passed in December 22, 2017 PERSONAL EXEMPTION has been set to zero. If married and filing separately, each spouse claims the standard deduction otherwise they will be required to itemize their deductions. If one spouse is itemizing, then the other is not allowed to claim the standard deduction. If both spouses itemize, there is no personal exemption and standard deduction which explains the $5 threshold for this category.
The deadline for filing the 1040 for 2022 is on April 18 (it’s annual due date is April 15), but for Americans living abroad, there is an automatic extension to June 15th. You may request another extension by filing Form 4868.
Mitigating Your US Taxes If Living Abroad
If you have lived at least one full year in a foreign country, there are 2 ways you can significantly reduce your US taxes. The first one would be through Foreign Earned Income Exclusion (FEIE) using IRS Form 2555). With the FEIE, you can exclude a certain amount of your FOREIGN EARNED income and for tax year 2021, this amount is $108,700.
If you earned a total of $120,000 in 2021, you can deduct $108,700 from this amount, so only $11,300 is taxable.
The second method to help lower your US tax bill is through Foreign Tax Credit and you apply for it by filing IRS Form 1116. Basically, this allows you to subtract the tax you paid to a foreign country from your US tax.
All tax returns should have an ITIN (Individual Tax Identification Number) or a Social Security Number (for a US citizen). Unlike the SSN which has a lifetime validity, ITINs are for a non-resident alien dependent or spouse which may require renewal.
If an individual owes a significantly delinquent tax debt (over $54,000 in 2021) the IRS is required to notify that person’s State Department, which will in turn revoke their passport.
Foreign Bank Accounts
The IRS is obligated to know about any income-generating money placed in foreign bank accounts (such as capital gains or interest) and there are 2 reporting requirements set for this – FBAR and FATCA.
The Foreign Bank Account Report (FBAR) was launched in 1972 and is required if your aggregate foreign holdings are at least $10,000 during the tax year. Beginning in 2014, the FBAR must be filed with the Department of the Treasury electronically as FinCen Form 114 on or before April 15th each year, while those living abroad can get an automatic extension until October 15th.
Foreign Account Tax Compliance Act (FATCA) requires the filing of form 8938 together with Form 1040 if your assets in the foreign country exceed at least one of the following thresholds:
Married but filing separately, residing in the US
File Form 8938 if your total foreign holdings are at least $50K on the tax year’s last day or exceeds $75K at any time during the tax year.
Married filing jointly, residing in the US
File Form 8938 if your total foreign holdings are at least $100K on the tax year’s last day or exceeds $150K at any time during the tax year.
Married but filing separately, residing abroad
File Form 8938 if your total foreign holdings are at least $200K on the tax year’s last day or exceeds $300K at any time during the tax year.
Married but filing jointly, residing abroad
File form 8938 if your total foreign holdings are at least $400K on the tax year’s last day or exceeds $600K at any time during the tax year.
If you need help in filing your taxes, you can engage the services of tax professionals such as Liberty Tax to make sure you are paying no more than what is required.