Whether you're an American citizen working in another country or one who moved in retirement, you still have to consider US tax laws. US expats are taxed on income made in the country in which they live, and, in some cases, may also owe US income taxes. Meanwhile, retirees can be taxed on retirement account withdrawals, depending on local laws. The good news is that, according to IRS data from 2016 to 2021, only 38% of Americans filing abroad owed money after claiming applicable credits and exclusions.
Below is a breakdown of tax filing deadlines, available credits, and other considerations for US expats.
Tax Return Extensions
The IRS grants US citizens and resident aliens living abroad (as well as active duty military personnel stationed outside the US) an automatic two-month extension on income tax returns. This means they have until June 15 to file (or the next business day, in the event that day is a Saturday, Sunday, or legal holiday). If a two-month extension isn't sufficient, they can apply for an additional two-month grace period by completing Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return).
Form 4868 must be completed and submitted before the expiration of the automatic two-month extension. Moreover, if expats owe taxes, they will also have to pay interest if their return isn't filed by the June 15 deadline. Single filer expats who made less than $14,600 in the previous tax year do not have to file.
Special Tax Benefits
The US is one of only three countries that taxes based on citizenship instead of residency, but it provides two important tax benefits for expats earning foreign income. The Foreign Earned Income Exclusion (FEIE) allows citizens outside of the US to exclude up to $130,000 of foreign earned income, or up to $260,000 for married couples filing jointly. To qualify, expats must either be in a foreign country for at least 330 days out of a 365-day period, or be a "genuine resident" of another country for a full calendar year.
The Foreign Tax Credit (FTC), meanwhile, allows expats to deduct taxes imposed by foreign countries on Form 1040 (Schedule A). This can be claimed in conjunction with the FEIE and applied to the remainder of income earned exceeding FEIE thresholds.
State Tax Considerations
Americans in nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) don't have to worry about state tax obligations whatsoever when filing their returns. This also applies to US expats. While the other 41 states and Washington, DC, impose state taxes on their residents, expats can avoid paying these taxes in most cases by changing their official residency status.
If an expat’s former state still considers them a resident, they'll likely have to pay state taxes on foreign earned income. For income tax purposes, residency is defined as still having a valid state-issued ID, owning property, being registered to vote, or having dependents in the state. While it's fairly easy to terminate residency in many states, some, including California and New York, have reputations for aggressively pursuing and auditing expats.
Non-residents are also required to file state returns reporting income gained from rental properties, capital gains from property sales, and royalties from IP registered in the state.
Self-Employment Expat Taxes
Filing US income tax returns as a self-employed individual is a complex process, one that's made even more difficult as an expat. To avoid costly errors that may result in tax penalties, it's best to work with a qualified tax professional. Otherwise, expats have to make accurate foreign currency conversions, apply the 15.3% self-employment tax rate, and keep track of deadlines to make quarterly payments. They must also submit Schedule C (business income), Schedule SE (self-employment tax), and likely Form 2555 (FEIE), along with Form 1040.
Because expats have to use the daily exchange rate between the US and the country in which they live, tracking income and expenses can be a complicated and time-consuming process. Most expats with recurring monthly income use average annual rates for the sake of simplicity. Like US residents, expats can still claim everyday business expenses, including home office costs, professional development, and travel for business purposes.
Self-employed expats are required to make quarterly installment payments on the 15th of April, June, September, and January. Putting away about 15% of monthly income is a good strategy to ensure expats can make these quarterly payments without penalty.
Taxation on Retirement Account Withdrawals
US expat retirees also need to consider local and US tax laws for retirement account withdrawals. Roth IRA withdrawals, for instance, are tax-free in the US, but are subject to local tax laws in some European countries. Contributions to retirement accounts like 401(k)s and IRAs are tax-free, but withdrawals are taxed at ordinary income rates. Expats residing in high-tax countries can offset foreign taxes by claiming the FTC.