Taxation as a US person living abroad

🇺🇸

 involves special considerations for individual taxpayers. 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.

Among the tax issues confronting US persons living abroad are additional reporting requirements for foreign bank and investment accounts, along with a number of applicable exclusions, deductions, and tax credits. A non-citizen spouse presents potential limitations on the inheritance and gifting of assets. Special tax assessments may be levied on the assets of those who renounce or relinquish citizenship, or abandon permanent residency.

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 residents. Collectively, these are all 'US persons'.

Expatriate
The IRS code defines "expatriate" as someone who has given up US citizenship or Permanent Resident (Green Card) status. Take care not to confuse this with the more normal English meaning of the term "expatriate," which merely refers to a citizen of one country residing in another country. To avoid confusion, this page avoids the term "expatriate" and uses "US person living outside the US" or "US person living abroad" to mean US citizens and Green Card holders living in countries other than 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 and financial accounts (FBAR)
If the aggregate contents of all financial accounts located outside the US exceeds $10,000 at any point in the year, you must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly Form TD F 90-22.1) by April 15 of the following year, with automatic extension to October 15 for all filers. This form goes to the Treasury Department, but NOT to the IRS -- it goes to a different branch of the Treasury. As of 2013, this form must be filed electronically. Electronic filing is done through the BSA E-Filing System site.

Statement of specified foreign financial assets (FATCA)
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 your tax return.

The Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FinCEN Form 114 (FBAR, above). Individuals must file each form for which they meet the relevant reporting threshold. A comprehensive FAQ detailing requirements for each form can be found at the IRS: Comparison of Form 8938 and FBAR Requirements.

Foreign Earned Income Exclusion (FEIE)
The IRS sums up the Foreign Earned Income Exclusion (FEIE):

You use Form 2555, Foreign Earned Income to figure your FEIE.

Note that the FEIE only applies to earned income (wages and salary), not to passive income (rent, interest, dividends, capital gains). 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, and even outer space, are all 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 full-time resident of Japan, and are sent by a Japanese employer to the US on a 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 you can take 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:

Foreign housing exclusion or deduction
You can take an exclusion or deduction 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 you can claim that varies by location. You use Form 2555, Foreign Earned Income to figure the exclusion or deduction.

The IRS describes what expenses are eligible:

For further details, see the instructions to Form 2555.

Living in a US territory outside of the USA
US territories and possessions include American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, and Puerto Rico.

The IRS notes:

Choosing a filing status
If your spouse is a non-resident alien, and you wish to file as Married Filing Jointly, you will need to choose to treat your spouse as a US resident for tax purposes as noted in Publication 54:

Once this election is made, it continues for all subsequent years. If you revoke it, you generally cannot ever choose it again.

Note that choosing to treat a nonresident alien spouse as a US resident creates US reporting requirements for all of that spouse's income and assets.

Publication 54 also notes:

For further details, see Publications 54 and 501.

Special conditions on spousal inheritance and gift taxes
A short summary of inheritance and gift tax issues with a non-US citizen spouse is given by Nolo:

Note that these issues apply not only to US persons abroad, but to any US person who is married to a non-US citizen.

Establishing permanent residency in US
It is possible for the foreign spouse (or other immediate relative) of a US citizen to apply for US permanent residency while still outside the US. According to the US Citizenship and Immigration Services:

For details, see the USCIS "Consular Processing" page.

US Citizens
Two typical ways to lose your US citizenship are:
 * Relinquishing US citizenship: If you take the citizenship of another country with the intent of relinquishing US citizenship, you are 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.  On November 9, 2015, the consular processing fee for relinquishment rose from zero to $2350.
 * Renouncing US citizenship: You can also "renounce" US citizenship, which requires taking an oath of renunciation at a US embassy or consulate.  This costs a $2350 processing fee as of September 12, 2014, and potentially subjects you to application of the Reed Amendment.

For tax purposes, relinquishment and renunciation are identical, with your tax filing obligation continuing up until the date of the appointment at the embassy or consulate. For other purposes (such as transmitting US citizenship to your children), the effective date of loss of citizenship is the date of the relinquishing act (such as acquiring another citizenship with intent to relinquish US citizenship), or if renouncing, the date you take the renunciation oath at the embassy or consulate.

Green Card holders
The elective way to lose a US Green Card:
 * Abandoning US permanent residency: This is similar to relinquishing US citizenship.  You need to file Form I-407, Abandonment of Lawful Permanent Resident Status with the local US embassy.

Tax consequences
In either case of losing citizenship, or in the case of losing permanent residency if you have been a lawful permanent resident of the US for at least 8 of the past 15 years, the tax implications are similar. You need to fill out IRS Form 8854, Initial and Annual Expatriation Statement, and potentially pay exit taxes based on a deemed disposition of assets and a deemed immediate distribution of all pension and retirement savings.

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.

401(k) and Roth 401(k) contributions
If you have access to 401(k) and/or Roth 401(k) plans, it may be worth thinking about what order to make contributions to what kind of plan. For example, it may make sense to make pre-tax contributions to a 401(k) until you no longer have taxable income (with the remainder being untaxed due to application of reductions such as the FEIE, the Standard Deduction, and the Personal Exemption), and make post-tax contributions with any amounts above that.

IRA and Roth IRA contributions
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 is 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, your 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.

Investing locally (from outside the US)
If you invest where you live, you need to be aware of several issues and hindrances relating to US tax.

Passive foreign investment company (PFIC)
Mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs) and other collective investment vehicles, if they are not registered with the US Securities Exchange Commission (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 requires the submission of Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund with your tax return, which can be an extremely time consuming task.

For a discussion of how to invest using individual stocks, see the Wiki page on passively managing individual stocks.

US persons living in the UK should use HMRC 'reporting funds' to avoid the UK's higher tax rates for gains in offshore funds. Several Vanguard US domiciled ETFs are HMRC reporting funds. For more, see the Wiki page on Vanguard US domiciled ETFs that are HMRC reporting funds.

Forms W-9 and W-8BEN
If, as a US person, you open a financial account outside the US that deals with US securities (brokerage dealing in US stocks and ETFs, for example), you should be given a Form W-9 to fill out. This is used to identify owners of US securities who are US persons, and tells the brokerage NOT to withhold US taxes from US-source distributions, since you will declare them on your US tax return separately.

If you are a US person, you should NOT fill out a Form W-8BEN, which is for non-resident aliens, and will typically result in US taxes being automatically withheld on distributions. (Note that such automatic withholding does not relieve you of the requirement to report the distributions on your US taxes, it just makes the job more complicated.)

US-based brokerages
While most brokerages, both US based ones and non-US based ones, now refuse access to US persons living outside the US due to FATCA, Interactive Brokers(IB) welcome this client group.

Several major US brokerages do not allow investors to open accounts from outside the US. For example, Vanguard is one such broker. Another example is Schwab, which no longer offers accounts to residents of Japan.

Cross-border taxation
In general, other countries will not recognize the tax-advantaged status of US accounts such as IRAs, 401(k)s, Coverdell ESAs, and 529 plans. And symmetrically, the US generally does not recognize other countries' tax-advantaged accounts either.

There are some limited exceptions, depending on tax treaty. For example, the US-Canada tax treaty provides for cross-recognition of some (but not all) tax advantaged accounts in either country, as does the US-UK treaty. But the US-Japan treaty, for example, has no such provisions, so Japan will treat a Roth IRA as just another taxable account, and the US will do the same with a NISA (Japan's equivalent to a Roth IRA).

Canadian tax advantaged accounts
Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) held by US citizens can receive tax exempt status, although under some circumstances they may need to be reported annually using Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans.

Registered education savings plans (RESPs) and Tax-Free Savings Accounts (TFSAs) cannot receive tax exempt status and may be subject to additional tax filings.

US Department of the Treasury

 * Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts(FBAR), from the U.S. Department of the Treasury
 * BSA E-Filing System, from the U.S. Department of the Treasury

IRS guidelines

 * U.S. Citizens and Resident Aliens Abroad
 * Foreign-Earned Income Exclusion
 * Foreign Tax Credit
 * Tax Treaties
 * Individuals Living or Working in U.S Possessions
 * Non-Resident Alien Spouse
 * Expatriation Tax
 * Foreign Account Tax Compliance Act (FATCA)

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
 * Publication 514, Foreign Tax Credit for Individuals
 * Form 8938, Statement of Specified Foreign Financial Assets
 * Publication 570, Tax Guide for Individuals With Income From U.S. Possessions
 * 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