Tax season is a dreaded season for Americans everywhere, including abroad. But an expat no longer lives in the United States, so why do they need to pay US taxes? Expats are still required to pay US taxes for a variety of reasons, even if they have no plans of returning to the states to live or work.
Filing US taxes as an expat is necessary, to avoid penalties and ensure nothing is held up with your passport. As frustrating and confusing as expat taxes can be, keeping up-to-date on filing can save you an even bigger headache down the road.
Do All Expats Need to Pay Taxes?
If you’re an expat and you’ve earned more than the $400 threshold through self-employment income, or around $12,500 through any income (e.g. wages, rental income, interest, or dividends), o5r just $5 of any income if you’re married to a non-U.S. taxpayer), you’ll need to file taxes. Luckily, expats get an automatic tax-filing extension to help combat any possible hold-ups with mailing and processing.
Although filing US taxes is still required for expats, most Americans living abroad don’t have to pay anything. This is thanks to different tax credits and programs American ex-pats are eligible for to prevent being double taxed. There are three main credits and exclusions that are beneficial to ex-pats:
- Foreign Earned Income Exclusion: This exclusion is in place to prevent American ex-pats from being double-taxed on their income. If your host country already taxed income you earned in that country, the US cannot tax you again.
- Foreign Tax Credit: After converting the taxes you paid in a host country into USD, you can file for a foreign tax credit with Form 1116.
- Foreign Housing Exclusion: This exclusion allows you to write off various housing expenses on your taxes as an expat.
Why is Filing Necessary?
Filing US taxes as an ex-pat may be frustrating, but it is necessary. Failing to file your taxes, even if you no longer live in the United States, can get you into legal trouble and cause issues if you decide to return to the country.
It’s Required by Law
First and foremost, filing your taxes is required by law. Failing to do so and deliberately evading your taxes can land you in serious legal trouble. Rather than subjecting yourself to hefty fines and potential jail time, it’s best to get your taxes done by the deadline.
Failing to File Will Result in Penalties
Expats who fail to file their taxes are subjected to penalties, late fees, interest costs, and potential jail time depending on the situation. Failing to file entirely will result in a fee of 5% of unpaid taxes for each month that you’re late filing. Late payments, or avoiding payment altogether, will result in a 0.5% fee for each month your payment is late.
The fees charged for late filing or payments cap at 25% of your unpaid taxes each month until you file.
It’s Necessary for Passport Purposes
If you have continuous issues with the IRS, they can issue a certification to the State Department. When this happens, the State Department can reserve the right to either deny you a passport renewal or revoke your passport’s authenticity.