Taxation as a US person living abroad

 involves special considerations for individual taxpayers. According to the IRS, "If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside."

US person
For US tax purposes, US citizens and permanent residents (Green Card holders) living outside the US face the same filing requirements, as US persons.

Note for Green Card holders that even living outside the US long enough that the Green Card is considered to have become invalid by the US immigration authorities does NOT change their taxation status in the eyes of the IRS. To become released from US tax filing requirements as a resident alien, it is necessary to formally surrender the Green Card, a process typically requiring a trip to the nearest US embassy, and then filing Form 8854, "Initial and Annual Expatriation Statement." See "Expatriation tax," below, for further details.

Expatriate
"Expatriate," as defined by the IRS code, refers to someone who has given up US citizenship or Permanent Resident (Green Card) status. This is not to be confused with the common English meaning of the term "expatriate," which merely refers to a citizen of one country residing in another country. To avoid confusion in this web page, we will use the term "US person living abroad" to mean US citizens and Green Card holders living outside the US.

Form 1040
US persons living outside the US must still file tax returns with the IRS. They receive an automatic 2-month extension to the filing deadline.

Report of foreign bank accounts (FBAR)
If the aggregate contents of all financial accounts located outside the US exceeds $10,000 at any point in the year, one must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts by June 30 of the following year. This form goes to the Treasury Department, but NOT the IRS -- it goes to a different branch of the Treasury. As of 2013, this form must, in general, be filed electronically, unless one calls and asks for permission to file on paper. Electronic filing is done through the BSA E-Filing System site. Note that not only accounts belonging to oneself must be reported, but also any accounts over which one has signature authority, such as company or other organizational accounts.

Statement of specified foreign financial assets
Form 8938, Statement of Specified Foreign Financial Assets (often referred to as the FATCA form), is similar to the FBAR, and reports almost the same information, but this form is filed with the IRS along with one's tax return.

Foreign Earned Income Exclusion (FEIE)
The IRS sums up the Foreign Earned Income Exclusion (FEIE) : "'If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation ($91,500 for 2010, $92,900 for 2011, $95,100 for 2012, and $97,600 for 2013).'"

Note that the FEIE only applies to earned (wages and salary) income, not to passive (rent, interest, dividends, capital gains) income. Where the work was performed determines where the income is deemed to have been earned, NOT where the money comes from. For example, if you live and work abroad and are paid by a US employer, it is foreign earned income (with exceptions for some government employees). If you live abroad and work for a foreign employer, and are sent to the US on business, all wages earned while physically in the US are considered US-source income. Also, income earned in international airspace, international waters, Antarctica, outer space, etc. are treated as US-source income.

Tax treaties may have the effect of returning the right of first taxation to a foreign government even for work performed in the US. A foreign tax credit may need to be used in this case. For example, if you are a permanent resident of Japan, and are sent to the US on business trip, the US-Japan tax treaty specifies that the income earned while in the US is to be treated as though it were earned in Japan. You cannot, however, exclude this income from US taxation using the FEIE. Instead, you need to pay whatever Japanese taxes are due on the income, and then use the Additional Foreign Tax Credit worksheet in the back of Pub. 514 to calculate the foreign tax credit that can be taken against the US taxes levied on that same income.

Foreign Tax Credit (FTC)
A foreign tax credit (FTC) may be taken for foreign taxes paid on income that is not excluded using the FEIE. In some cases, where the foreign tax rate is high enough to more than cancel any US taxes due, it may be more advantageous to use only the FTC and forgo the FEIE -- for example, to preserve eligibility to make IRA contributions.

Note that there are limitations on the ability to switch back and forth between using the FTC and the FEIE. Regarding the FEIE, the IRS states : "'Once you choose to claim an exclusion, that choice remains in effect for that year and all future years unless it is revoked. To revoke your choice, you must attach a statement to your return for the first year you do not wish to claim the exclusion(s). If you revoke your choice, you cannot claim the exclusion(s) for your next 5 tax years without the approval of the Internal Revenue Service. See Pub. 54 for more information.'"

Foreign housing exclusion or deduction
An exclusion or deduction may be taken for certain foreign housing-related expenses, to the extent that they exceed a certain threshold (approx. $15,000/year in 2012). There is a cap on the amount that can be claimed that varies by location.

The IRS describes what expenses are eligible : "'Line 28. Enter the total reasonable expenses paid or incurred during the tax year by you, or on your behalf, for your foreign housing and the housing of your spouse and dependents if they lived with you. You can also include the reasonable expenses of a second foreign household (defined later). Housing expenses are considered reasonable to the extent they are not lavish or extravagant under the circumstances."

"Housing expenses include rent, utilities (other than telephone charges), real and personal property insurance, nonrefundable fees paid to obtain a lease, rental of furniture and accessories, residential parking, and household repairs. You can also include the fair rental value of housing provided by, or on behalf of, your employer if you have not excluded it on line 25."

"Do not include deductible interest and taxes, any amount deductible by a tenant-stockholder in connection with cooperative housing, the cost of buying or improving a house, principal payments on a mortgage, or depreciation on the house. Also, do not include the cost of domestic labor, pay television, or the cost of buying furniture or accessories. '"

For further details, see the instructions to Form 2555.

Expatriation tax for losing citizenship or permanent residency
Two typical ways to lose one's US citizenship are:
 * Relinquishing US citizenship: If one takes the citizenship of another country with the intent of relinquishing US citizenship, one is considered to have "relinquished" US citizenship.  The local US embassy still has to be notified in person for the loss to be recognized by the US government, however.
 * Renouncing US citizenship: One can also "renounce" US citizenship, which is almost the same process as relinquishing, but costs an extra $450 processing fee and potentially subjects one to application of the Reed Amendment.  (Note that even if one takes another citizenship intending to relinquish, if one then travels on their US passport, votes in a US election, or performs any other act indicating that one still considers oneself a US citizen after the putative expatriating act, one will be deemed not to have relinquished after all, at which point renouncing may become the only recognized way to lose US citizenship.)

For Green Card holders:
 * Abandoning US permanent residency is similar to relinquishing US citizenship. A Form I-407, Abandonment of Lawful Permanent Resident Status needs to be filed with the local embassy.

In either case of losing citizenship, or in the case of losing permanent residency if one has been a lawful permanent resident of the US for at least 8 of he past 15 years, the tax implications are similar. One needs to fill out IRS Form 8854, Initial and Annual Expatriation Statement ,, and potentially pay exit taxes based on a deemed disposition of assets.

The above are the most common general cases, but there are many special cases and exceptions, and different rules apply for those who lost citizenship or residency in previous years. For details, see Instructions for Form 8854, and the IRS discussion of the expatriation tax.

This is also an area where the laws have been changing frequently in recent years, so due diligence is called for if contemplating taking any of the above steps.

Roth IRA considerations
If you use the FEIE, you cannot use any of the excluded income to contribute to an IRA. You can contribute if you have earned income above the FEIE limit, and below the IRA contribution cutoff. You can also contribute using earned income that it not excludable (for example, wages earned during a business trip to the US, which are considered US-source income even if paid by a non-US employer). In the case of spousal IRAs, one spouse's non-excluded income can be used to found a spousal IRA. Pub 590 is quite clear on this question:
 * 1) Taxable compensation for IRA contribution purposes does not include income excluded under the FEIE or housing exclusions, but if one spouse has taxable compensation in excess of this exclusion, the excess income can fund an IRA contribution.
 * 2) A spousal contribution can be made for the lower earning spouse using income from the higher earner. The spouse whose taxable compensation exceeds the FEIE can therefore provide this excess taxable comp for the other lower earning spouse. In other words, the excess taxable comp of the higher earning spouse does not have to be applied to the remaining FEIE of the lower earning spouse.

It is not mandatory to use the FEIE, but if one does use the FEIE, one has to use all of it, and exclude all income that is excludable up to the exclusion limit. It is NOT possible to partially exclude eligible earned income and leave some un-excluded for IRA contributions.

Investing locally
If you invest where you live, there are certain issues to be aware of.

PFICs
Mutual funds, ETFs, REITs and other collective investment vehicles, if they are not registered with the SEC, are classified under US tax law as Passive Foreign Investment Companies, or PFICs. The taxation on these under US law is extremely unfavorable, and require the submission of Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund with one's tax return, which can be an extremely time consuming task. In general, to avoid having to deal with PFIC issues requires investing only through SEC-registered investment vehicles (which may in turn incur tax problems with the local tax authorities), or else through individual stocks and bonds.

IRS guidelines

 * U.S. Citizens and Resident Aliens Abroad
 * Foreign-Earned Income Exclusion
 * Foreign Tax Credit
 * Individuals Living or Working in U.S Possessions
 * Non-Resident Alien Spouse
 * Expatriation Tax

IRS publications and forms

 * Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
 * Publication 519, U.S. Tax Guide for Aliens
 * IRS Form 2555, Foreign Earned Income
 * IRS Pub. 514, Foreign Tax Credit for Individuals
 * Form 8938, Statement of Specified Foreign Financial Assets
 * Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
 * Disclosure, Privacy Act, and Paperwork Reduction Act Notice for Form 8621
 * IRS Form 8854, Initial and Annual Expatriation Statement