Paying American Taxes Abroad

*updated for 2016

It’s something that should never cross our minds when enjoying ourselves abroad, but mid-April becomes an irritating time for most Americans because of the looming burden of Tax Day on April 18.  It causes plenty of problems and stress for those living within the United States.  But how about those of us living outside the borders of our own country?

Do Americans Abroad Have To Pay Taxes?

The short answer is yes.

The United States is one of only two countries in the world to tax foreign-earned income of its citizens, even if they don’t reside in the country.  The only other is Eritrea, and I can’t say I’ve ever met any Eritreans abroad.  All Americans abroad are required to report their income to the IRS and pay the relevant taxes, even if you never set foot inside the country all year.

The good news is that the income level you begin paying taxes was at US$99,200 in 2014 and has increased yearly with inflation to US$100,800 for 2015 and US$101,300 in 2016.  This means that most people traveling long-term or working abroad will never need to pay taxes on their foreign-earned incomes, since nearly all foreign salaries are lower than US$100,800.

Do Americans Abroad Have to File Taxes by April 18?

Yes, all Americans are required to file a tax return, regardless of their location in or out of the United States.  This can become quite annoying if you are required to physically mail your documents.  However, this is where online tax preparation can become very useful.  By using these online programs like TurboTax or H&R Block, you are able to submit near-instantly and get a response on your refund within a few hours.

Where these online services can also come in handy is extending your filing date.  Americans abroad are allowed to defer their tax filing for 2 months by applying for an extension on these grounds.  Online apps like TurboTax allow for this application for extension to be done quickly and easily.

Claiming Foreign Income

Foreign employers will rarely, if ever, provide a W-2 form to report your earnings.  Thankfully, the forms for reporting foreign income are much more lenient than reporting W-2’s.  No additional paperwork is needed other than the USD amount of foreign salary earned and the name and address of your employer.  These address forms are not very picky, since many foreign address formats are unlike what general tax forms allow.

Once the foreign-earned income has been entered, you will be given additional options (housing, food, work-related, travel) in which you can enter either allowances or expenditures in addition to your income.  Much of the time, these expenses will be negligible and not worth entering, since the total amount will be deducted anyway.

At the end of this process, your foreign-earned income will be deducted, once you prove residency.

Proving Your Expat Residency

Residency is a tricky thing and varies immensely with which state you come from, as each has its own laws about it.  While there are too many legalities to get into here, the short of it seems to be that you are a resident of the state you lived in prior to going abroad, unless you make an active effort not to be.

For example, I am still a resident of Michigan, despite only having visited there 2 times in the last 5 years.  My permanent mailing address, my main bank account, and my voting registration all link me there.  However, this type of residency only matters when it comes to filing state taxes.

When filing federal taxes with the IRS, they give you 2 ways to prove your foreign residency: the Physical Presence Test and the Bona Fide Residency Test.

Physical Presence Test

Bona Fide Residency Test

What Do I Do?

I have filed every year since living abroad, despite having US$0 taxable income in the United States.  What this usually results in is a couple hours of my time wasted on an online filing program like TurboTax and then paying money to tell the government that I don’t owe them any money.  E-Filing makes this immensely easier, since letters can take weeks to arrive to the United States, if they ever do at all.

Maintaining a permanent mailing address in the United States with someone you trust can be quite helpful too.  Even if you don’t live there, having that person forward you messages you receive is much more reliable than any electronic or snail mail communication you’d otherwise receive abroad.  As stated above, I maintain a permanent mailing address in Michigan at my mother’s home, despite the fact that I have never lived there.

Online tax software is the best option to quickly and easily finish the tax-filing nuisance.  And since all of them will offer the ability to instantly e-file the taxes, they take care of the worrisome distance gap.

For several years, I used TurboTax.  The interface is great and it provides an explanation for almost any question or confusion one might have.  However, the price has steadily increased each year I used it, and this year I was paying US$100 to tell the government I don’t owe them money.

There was also an unresolvable issue last year where TurboTax wouldn’t let me e-file for having 0 in many of the values.  When I am earning US$0 taxable income, it stands to reason that several slots will end up 0.  Even the support phone line couldn’t tell me why this was an issue.  Instead, it was telling me the only option was to mail them out, which was not an option for me.

Afterward, I tried out a different program, TaxAct.  While not as refined and helpful as the TurboTax interface was, TaxAct ended up being faster and did not prevent the e-file as TurboTax had done.  And this only cost me US$20 instead of the $100 TurboTax charged.

What Do Other America Expats Do?

When this time of year comes around, the attitude of Americans I’ve met abroad greatly varies.

On one end, you have people that just don’t care.  They’ll just laugh at the prospect of paying taxes to a country they are not living in at the moment, despite the fact they won’t actually be paying any taxes.  How this works out in for them in the long term, I’ve never found out.

Then there are those who recognize it matters but don’t do anything about it.  These people might do nothing.  They might say they’ll file, but never do.  They might keep meticulous records of pay and expenditures in anticipation of their return to the United States, but not do anything else before.

Or there are those like me who take on way too much stress to get them filed despite the ridiculousness of the whole situation of filing for foreign income that the United States doesn’t tax.

The Final Word

It is each person’s own decision how he or she chooses to deal with this ridiculous US policy while they are abroad.  It may be the smart thing to file.  It may be completely moot.  Whichever you might choose, it’s something all of us living outside of the country should know much more about.