Filing Your U.S. Taxes While Living Abroad
Categories: Finance
So you’re a US citizen and have chosen the Netherlands to live and work. But did you know the USA requires overseas income to be declared when earned abroad? This guide will tell you how to deal with this.
Filing taxes in the USA, even if you don’t live there
Are you a U.S. citizen, green card holder, or “Accidental American” (those born in the USA but have never resided there)? Did you know your income from abroad follows the same rules as in the United States? No matter where you live, you must file a federal tax return and pay taxes on your worldwide income. There is a tax filing deadline for citizens living abroad. The next deadline is June 15, 2023.
Three levels of government impose income taxes in the U.S.:
- federal government
- state governments
- (sometimes) local governments
Taxes on incomes are applied at a percentage rate at both the federal and state levels. The tax rates, application methods, types of income taxable, and the deductions and credits available vary considerably at these three levels.
Renouncing citizenship to avoid filing a tax return in the USA
You won’t pay U.S. taxes if you renounce your U.S. citizenship. But the government charges $2,350 to do so. You may also be subject to an exit tax. Exit tax is defined by a complex calculation, including several factors like having lots of assets or a net worth of $2 million. If you wanted to renounce your citizenship and had to pay an exit tax, your tax liability is calculated as if you sold your assets at fair market value. However, it goes without saying that if you decide to renounce your U.S. citizenship, you are taking a major, life-changing step. You should take into consideration all the pros and cons. You would also need another passport. Your renunciation appointment will require you to bring this document. Without a second passport, the State Department will deny anyone the right to renounce their U.S. citizenship.
Thresholds for filing based on types of income
American citizens living abroad, regardless of where they earn their income, will have to file a tax return if their total income in 2023 exceeds the following minimum thresholds. These thresholds are the same as for U.S. residents, as the IRS doesn’t distinguish between residents and nonresidents when it comes to thresholds.
| Your IRS filing status | at the end of 2023, you are | Minimum income threshold |
|
Single |
Under 65 | $13,850 |
| 65 or older | $15,700 | |
| Married filing jointly | Under 65 (both spouses) | $27,700 |
| 65 or older (one spouse) | $29,200 | |
| 65 or older (both spouses) | $30,700 | |
| Married filing separately | Any age | $5 |
| Head of household | Under 65 | $20,800 |
| 65 and older | $22,650 | |
| Qualifying widower | Under 65 | $27,700 |
| 65 and older | $29,200 | |
| If you are self-employed, the minimum income threshold is $400, irrespective of your marital status or age. Being self-employed overrides all of the categories. | ||
You’ll generally need to have a kid to qualify as a head of household. If you are unsure what your filing status, the IRS has a handy tool that walks you through some questions to give you your definition. The IRS also has a tool that helps you understand if you need to file a tax return based on several questions about your income.
The amount of tax you will pay depends on several factors. For the 2023 tax year, there are seven federal tax brackets. The lowest tax rate is 10%; there are also 12%, 22%, 24%, 32%, and 35% rates, and the highest tax rate is 37%. Two main factors determine your tax bracket; filing status (single, married, and head of household) and your taxable income.
Double taxation
Double taxation occurs when the same income is taxed twice. Double taxation on income can be avoided in two main ways, by applying for Foreign Earned Income Exclusion or Foreign Tax Credit.
| Foreign Tax Credit | Foreign Earned Income Exclusion | |
| Overview | The Foreign Tax Credit reduces a taxpayer’s U.S. tax liability dollar-for-dollar when qualifying foreign income taxes are paid.
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The Foreign Earned Income Exclusion allows taxpayers to exclude up to $120,000 of foreign-earned income from U.S. taxes (2023 figure). There are two tests they must pass to qualify: the Physical Presence Test or the Bona Fide Residence Test.
To establish a foreign tax residence, the taxpayer must be physically outside the U.S. for 330 days during a 12-month period. To qualify for the Bona Fide Residence Test, taxpayers must establish their tax home in a foreign country for an uninterrupted period of time, covering an entire tax year.
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| Pros | Taxpayers earning income in a high-tax country are more likely to benefit from the Foreign Tax Credit since it is applied dollar-for-dollar against their U.S. tax liability.
In the U.S., the top tax rate is currently 37% (2023 figure). In the Netherlands, the maximum rate is 51.75%. This means you may have already paid all the taxes you need compared.
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Foreign Earned Income Exclusion (FEIE) can be helpful if you get the 30% ruling.
The Foreign Earned Income Exclusion will allow you to shield up to $120,000 (2023 figure) from U.S. taxation.
There are also specific foreign housing amounts you can exclude or deduct. The base limit of which is $16,800
You may be able to claim your employer’s and lodging |
| Cons | Because they are not income taxes, foreign real estate, social security, and property tax and do not qualify for the credit.
If you have the 30% ruling here in the Netherlands, FTC isn’t the best option
Some foreign taxes are not eligible. |
Foreign Earned Income Exclusion has a very high bar. Your entire family must physically leave the U.S. for 330 days to qualify for this tax credit.
It requires filing multiple tax forms It is binding; you must keep using it yearly. If you revoke it, you can’t use it again for 5 years. |
| Can I use both? | In the same year, you can take both the Foreign Earned Income Exclusion and the Foreign Tax Credit; they can be used together, although they are not on the same dollar of income. | |
Tax Treaties
It’s important to check whether the host country has a tax treaty with the United States, as this could also have an impact on one’s overall tax obligation. In most cases, the two aforementioned methods do help avoid double taxation issues.
Totalization Agreement
Totalization agreements are agreements between countries to eliminate dual social security coverage. This is when a person from one country works in another country and pays social security taxes to both countries. According to each Totalization Agreement, workers’ coverage is assigned to the country with the most significant economic attachment. Workers and employers typically obtain exemptions from social security taxes in other countries if they meet some requirements.
Totalization agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country. U.S. agreements can be misinterpreted as allowing employees with dual coverage or their employers to select the system to which they will contribute.
Often times one will need to submit a document from the local authorities to prove that you are covered (or not) in the country of residence.
Child Tax Credits
Children under 17 may qualify for a refundable tax credit of up to $2000. Several requirements must be met by both the taxpayer and the child to qualify for the credit. An additional child tax credit may be available when a taxpayer’s child tax credit exceeds their tax liability. Individuals receiving less than the full child tax credit are eligible for the additional tax credit. Taxpayers who do not owe taxes may receive a refund from the additional child tax credit. To claim this credit, taxpayers must meet additional requirements. Taxpayers can lower their tax liability with a nonrefundable tax credit to zero, but not below zero. There is no refund for the child tax credit.
Taxpayers can get a refund while lowering their tax liability to zero with a refundable tax credit. Refunds are available for the additional child tax credit.
The child tax credit can still be claimed by U.S. citizens living abroad, provided the child has a valid SSN. You must file your tax return differently than in the U.S. You can’t claim the refundable portion if you claim the foreign-earned income exclusion.
It may still be possible to receive a refund if the foreign income exclusion isn’t claimed and the foreign tax credit is claimed instead. From now until 2025, the refundable portion of the tax credit is raised to $1,600.
Streamlined Filing Procedure
The IRS requires expats to file tax returns yearly, despite many living abroad for years without realizing the need. If this sounds like you, don’t panic, the IRS has created a way for you to get caught up. There is a penalty-free process called the Streamlined Filing Compliance Procedure. This is to assist individuals who have not willfully or purposefully attempted to evade taxes. They were simply unaware. This procedure is a once-in-a-lifetime opportunity, so it can only be done once.
As part of your application, you must include a signed statement stating that failure to file was not willful. When incorrect returns have been filed previously, amended returns can be filed. A prerequisite for the program is that you must show that you would have filed if you had known it was required. To qualify, you must have been physically present outside the United States for at least 330 full days during one of the three most recent tax years without having an address in the United States during the three most recent tax years.
Summary
This article provides tips on how to file US taxes abroad; however, it isn’t a comprehensive guide. There is a well-written guide on the IRS website; however, even with that guidance, tax can be complicated. Blue Umbrella is based in the Netherlands and helps U.S. citizens living in the Netherlands file their U.S. tax returns.