If I Live Overseas, Do I Have to File a US Tax Return? Posted on 1 Mar 00:55 , 0 comments

Article by I.J. Zemelman, EA, Taxes for Expats

If you are an American Citizen living overseas and earning income…Yes, you are required to file an annual US expat tax return and report all worldwide income.  The good news, however, is that – unless you’re in a very high tax bracket – you may actually benefit from filing an annual US expat tax return.  As a matter of fact, many US Expats wind up either breaking even or receiving a refund from the IRS.

In some cases, a US Citizen living abroad may have actually earned less in a taxable year than the minimum filing threshold established by the IRS.  Even if you didn’t earn enough income to be required to file a US expat tax return, it may still be in your best interest to file a return anyway.  According to the IRS in a recently published memo, those who are not technically required to file may still qualify for a refund – whether it’s for having had excessive federal taxes withheld from the pay you did receive or because of the fact that you qualified for any number of tax credits outlined below.

In the same IRS memo that was previously mentioned, there were 5 specific situations in which it’s beneficial to file a US expat tax return. They are:

  • EITC (Earned Income Tax Credit):  If your earnings in 2012 were less than $50,270, you may qualify for the EITC – a credit designed to help low income taxpayers.  The IRS reports that out of all the taxpayers who qualify for the EITC, only 80% actually claim this credit.  That’s 20% of a population missing out on an IRS tax credit which is potentially worth thousands of dollars; depending on your income level and the number of qualifying dependents, you could qualify for an EITC of as much as $5,891 – although the average amount in 2011 was $2,200.  The IRS provides a worksheet online at the IRS website and in the instructions for Form 1040.
  • Refund Eligibility:  If you worked even a portion of the year for a company in the United States and your American Employer withheld federal taxes from your salary, you may have overpaid federal taxes and are therefore eligible to receive a refund.  You also may be eligible to receive a refund if you had made an estimated tax payment to the IRS or if you realized that you had paid too many taxes in a recent previous tax year.
  • Dependents:  Each qualifying dependent entitles you to an additional credit.  It may be possible to have at least one qualifying dependent and still not receive the maximum Child Tax Credit, but in this situation you may still qualify for the Additional Child Tax Credit.
  • American Opportunity Credit:  This credit applies to college tuition fees paid for the initial 4 years of post secondary education.  Whether you’re paying for yourself to go to college or you’re paying for someone else to attend college, you may qualify for a credit of up to $2,500 through the American Opportunity Credit.  Even individuals who do not owe any taxes to the IRS may qualify for a refund of as much as $1K for each eligible student.
  • Health Care Tax Credit:  If you were the recipient of benefits from a qualifying Trade Adjustment Assistance Program or the Pension Benefit Guaranty Corporation and you are enrolled in an eligible health care plan, it is possible for you to earn a tax credit which is equal to 72.5% of the amount you paid for your health care plan premium.

As a US Expat filing a US tax return, there are other credits available to you that can further reduce your tax liability and increase your odds of getting a refund.  They are:

  • FEIE (Foreign Earned Income Exclusion):  The FEIE allows taxpayers living abroad and earning foreign income to deduct up to $97,600 (for 2013 – the FEIE is $95,100 for the 2012 tax year) of that income from their tax liability on US income taxes.  In order to qualify for the FEIE, certain conditions must be met; but most expats meet these conditions.  The Foreign Earned Income Exclusion is claimed by filing Form 2555 with your US expat tax return.
  • Foreign Tax Credit:  If you either earn more foreign income than the deductible amount on the FEIE or you choose not to claim the FEIE, you may use the Foreign Tax Credit to help minimize your US tax liability.  You cannot claim the Foreign Tax Credit for foreign taxes paid on income claimed in the FEIE.
  • Foreign Housing Allowance:  The Foreign Housing Allowance allows you to deduct up to 30% of the amount you claimed on the FEIE in qualifying housing costs.  Depending on where in the world you’re living, you may be able to claim even more due to the high cost of living.  This credit can help to significantly reduce your US tax liability, so it’s important to review the qualified costs outlined by the IRS and claim every last expense that you’re allowed to claim. 

Confused or Have a Question?

US taxes can be confusing enough, and filing an American tax return as a US Expat is even more challenging.  If you have questions about your international tax obligations or if you have questions about or need help filing a return, make sure to contact a qualified US Expat Tax Professional here at Taxes for Expats.