Understanding U.S. Taxes for Americans Living Abroad

For many Americans, the month of April means one thing, tax time. But for Americans abroad, the more relevant tax month is June, or even October! While living outside the country, you are still required to file a tax return and pay taxes on your income. In this article, our dedicated U.S. Private Wealth Manager, Michael Garcia will provide an overview of U.S. taxes for Americans living outside of the U.S. with a focus on tax filing deadlines, tax exclusions and credits, and other unique aspects of filing as an American expat with foreign income and assets.

Tax Residency Status

U.S. citizens are generally considered U.S. tax residents regardless of where they live, although there are some exceptions. Additionally, non-U.S. citizens who meet certain criteria (such as holding a U.S. Green Card) may be considered U.S. tax residents for a certain number of years.

Filing Deadlines

·     April 18th is the tax filing deadline for Americans, but expats have an automatic 2-month extension until June 15th.

·     If needed, an additional extension until October 15th can be requested.

·     All filing requirements and details are listed here.

Worldwide Income Reporting

U.S. tax residents must report their worldwide income on their tax return, including income earned abroad. However, there are several provisions that can help reduce or eliminate your U.S. tax liability on foreign earned income, such as the foreign earned income exclusion and foreign tax credit.

Foreign Earned Income Exclusion

This exclusion allows you to exclude a certain amount of foreign earned income from your U.S.taxable income. For tax year 2022, the maximum exclusion amount is $112,000.

To qualify, you must meet either the bona fide residence test or the physical presence test. The bona fide residence test requires you to be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. The physical presence test requires you to be physically present in a foreign country or countries for at least 330 full days during a 12-month period.

It is important to note that this exclusion only applies to earned income, such as salaries and wages. It does not apply to investment income, such as dividends or capital gains.

Foreign Tax Credit

This credit allows for offsetting U.S. tax liability by the amount of foreign taxes paid on the same income. To claim the foreign tax credit, you must file Form 1116 with your tax return.

This credit cannot be claimed with the foreign earned income exclusion on the same income. Our team of experts can help you review and decide on which provision to use, depending on which one provides the greatest tax benefit.

Passive Foreign Investment Companies (PFICs)

If you have foreign financial assets, you may also be required to file Form 8621, which is used to report information on certain foreign investments known as passive foreign investment companies (PFICs).  

Reporting and taxation of PFICs can be complicated and costly and it is generally better to avoid these types of investments. At Melbourne Capital Group, we offer our American clients access to international, U.S.-registered investment platforms along with qualified, SEC-regulated investment managers. The portfolios are composed of approved investments that are registered in theU.S., which will prevent them from being categorized as a PFIC.

Failure to comply with U.S. tax laws can result in significant penalties and fines, even if the incorrect reporting is deemed unwilful and an honest mistake. It is best to consult with an international U.S. tax professional if you have questions about your U.S. tax obligations.

In order to keep up with inflation, it is important to invest towards major life events such as retirement and children's education planning. For Americans, tax and investments go hand in hand regardless of country of residence. It is important to understand the U.S. tax and reporting implications involved with international investing in order to avoid high tax and complex reporting requirements.

Michael Garcia is Melbourne Capital Group's dedicated U.S. Private Wealth Manager with a decade-long experience of living abroad as an American. Michael's dedication and expertise in handling the complex world of international taxation and reporting requirements enable him to provide exceptional services to his clients. Do not hesitate to contact him at michaelgarcia@melbournecapitalgroup.com if you would like to ensure that your financial interested are protected and optimized to the fullest.

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