Following are a number of tax questions we hear often at OTS. The responses are meant to be as clear as possible. Keep in mind that tax law is very complex, and it is beyond the scope of this website to cover every detail or eventuality. And while we have made every effort to ensure that these answers are correct, they should not be taken as gospel. If you decide to prepare your own taxes, be sure to consult the relevant IRS publications for information. Pub. 54 is the place to start for overseas filers.
Tax Issues
- What do I need to know if this is my first time overseas?
- Is it true that I don’t have to pay any taxes if I live overseas?
- Do I have to file a tax return?
- When do I need to file my tax return?
- What if my paperwork is all back in the States?
- What if I cannot get all the financial info you need? Can you get it for me?
- Do I pay US taxes if my employer issues a W-2?
- What should I do if my employer does not give me an income statement?
- What if I am self-employed?
- What if my spouse is not a US citizen?
- What do I need to know about state taxes?
- What should I do if I haven’t filed in several years?
- How do I qualify for the Foreign Earned Income Exclusion?
- What does “earned income” include?
- What if I earned more than $108,700 (for 2021)?
- What is the Foreign Tax Credit?
- Do I need to report money I have in a foreign bank or financial account?
- What do I need to know about Social Security?
- What do I need to know about Individual Retirement Accounts (IRAs)?
- What do I need to know about the Affordable Care Act (“Obamacare”)?
- What happens if I want to take a “gap year”?
- What do I need to know about recent tax law changes?
What do I need to know if this is my first time overseas?
See the First Year Overseas page of this website for specific issues you need to be aware of. Then read through the Tax Issues explained below for more complete explanations.
Is it true that I don’t have to pay any taxes if I live overseas?
Maybe! If you meet certain requirements, you can take the Foreign Earned Income Exclusion, which allows you to exclude up to $108,700 from US income tax for 2021. Alternatively, if you are required to pay foreign income taxes at a higher rate than you would in the US, you may be able to use the Foreign Tax Credit instead of, or in addition to, the Foreign Earned Income Exclusion. But you are still required to file a tax return, even if you owe no tax. See “Do I have to file?”, “How do I qualify for the Foreign Earned Income Exclusion?”, and “What is the Foreign Tax Credit?” below.
Do I have to file a tax return?
In general, ALL US citizens living and working abroad are required by law to file an annual US tax return. If you are supposed to file and do not, you could be subject to civil penalties or criminal prosecution under U.S. federal law. Even if you are certain that you owe no taxes, you are still required to report your income and show (if applicable) that you are eligible for the foreign earned income exclusion or foreign tax credit. If you would be required to file if you were living in the US, then you are required to file while living overseas.
The only exception to this is if you made very little money and are not self-employed. In this case, you probably do not need to file.
When do I need to file my tax return?
- Normal US filing deadline: April 15 (See the Deadlines page for current filing season deadlines.)
- Automatic extension deadline for US citizens and resident aliens whose tax home is overseas: June 15. No extension request is necessary to file at this date, and no penalty will be assessed on taxes due if paid by this date. However, interest will be charged on taxes not paid by April 15. If you have been living overseas for at least a year, this is the deadline you will normally need to observe.
- If you need an extension beyond June 15, the extension request should be filed no later than June 15, and preferably earlier. You can get an extension until October 15 merely by requesting it.
- Bona fide residence test extension: If 2021 was your first year living overseas and you expect to pass the bona fide residence test in order to exclude your foreign income, you will need an extension until January 30, 2023. There is a special extension request form for this purpose. (Bona fide residence is explained below, under “How do I qualify for the Foreign Earned Income Exclusion?”)
- Physical Presence Test extension: If 2021 was your first year living overseas and you expect to pass the Physical Presence Test in order to exclude your foreign income, you will need an extension until 30 days after the end of your 12-month qualifying period. e.g. If you will spend 330 days overseas between Aug. 1, 2021 and July 31, 2022, you would request an extension until Aug. 30, 2022. There is a special extension request form for this purpose. (The Physical Presence Test is explained below, under “How do I qualify for the Foreign Earned Income Exclusion?”)
What if my paperwork is all back in the States?
You’ll need to get hold of it somehow. OTS has a US fax number. You can arrange to have someone in the States fax the paperwork to our number. (We can upload it to your OTS account so that you’ll have it as well!)
We recommend that, if feasible, you use your foreign address for your financial statements, rather than relying on your Aunt Mary in Middletown to keep track of everything for you. If your location makes international mail sound even less appealing than your Aunt Mary, at least try to arrange for someone reliable and willing to handle things from the US side.
If your paperwork is in storage and absolutely not accessible, you may need to request an extension until you are able to retrieve it. Alternatively, your financial institutions can probably send you duplicate copies. Again, these can be faxed to OTS if you wish.
What if I cannot get all the financial info you need? Can you get it for me?
One way or another, we will need your complete information. Financial institutions should be able to issue you duplicate statements, 1099 forms, etc., if yours are lost or inaccessible. In most cases, your financial institutions will not release information to third parties (such as OTS), so you will have to make the request yourself. Occasionally, for example if clarification is needed about a statement you have received, OTS may (with your permission) communicate directly with your bank or financial advisor. For prior years, it may be possible to get a transcript from the IRS of any reporting forms (W-2, 1099, etc) that they have on file for you. We can help you with this process.
Do I pay US taxes if my employer issues a W-2?
If you are employed by a US entity, you should receive a W-2 form reporting your earnings. Often, if you are eligible for the Foreign Earned Income Exclusion, no income tax will be withheld, but Social Security and Medicare taxes will be. The rules for filing your taxes are the same whether you work for a US or a foreign employer. Note that if you are a US government employee, you will not be eligible for the Foreign Earned Income Exclusion.
What should I do if my employer does not give me an income statement?
Your employer should be able to give you a statement of the salary and benefits you have received for the year. If this seems to be impossible, you may have to recreate it from your records. An income statement that is not a W-2 does not need to be attached to your tax return. But you should try to have some clear record of your earnings in the event your return is audited. See the note below, “What does ‘earned income’ include?”
What if I am self-employed?
OTS does not handle business taxes, but if you have a small, uncomplicated sole proprietorship (e.g. freelancer, tutor, consultant, etc.) we can probably help you. You need to be aware that the Foreign Earned Income Exclusion refers only to income taxes; you are still subject to self-employment taxes even if your business is overseas. This means that you may need to be filing quarterly estimated tax payments throughout the year. (In some cases, if you are subject to foreign Social Security taxes, you may be able to get a Certificate of Coverage so as not to have to pay Social Security tax in both countries. You can read more about this here.)
What if my spouse is not a US citizen?
If you are overseas and your spouse is neither a US citizen nor resident alien (green-card holder), you have a few options. You can file as Married Filing Separately, meaning you would report only your own income. If you have children and you provide more than half of their support, you may qualify to file as Head of Household. Or, as a third option, you may elect to treat your spouse as a resident alien for tax purposes, and file as Married Filing Jointly. This would mean you would report both of your incomes, which sounds unattractive but isn’t always. Because there is a higher standard deduction for filing jointly than for filing separately, as well as various other ways in which the tax code treats joint filers preferentially, you may in some cases be better off filing jointly. However, this does bring your spouse under the far-reaching arms of the IRS, which may not be beneficial. There are both long- and short-term implications of making this election, and we would need to review your particular circumstances in advising you on how best to file.
What do I need to know about state taxes?
Whether or not you need to continue filing a state tax return while you live overseas will depend on your state of origin. Each state has its own rules about whom it considers a resident and who must file. Even if you need to file, most (but not all) states allow the same foreign earned income exclusion as the US government. However, most states do not honor the Foreign Tax Credit. State filing and residency rules for a number of states can be found here. OTS will help you evaluate your situation to determine whether or not you have an obligation to file a state income tax return.
What should I do if I haven’t filed in several years?
In September 2012 (modified in 2014), the IRS announced a “streamlining” program for overseas nonfilers. If you meet the requirements, you can file just three years of missing returns, along with six years of missing FBAR forms, and the IRS will not pursue any earlier missing returns. You can read the details of this program here. If the IRS has already requested missing returns, then you’ll need to go back as far as they ask.
Note that if you had significant tax due for years that you didn’t file, and if the IRS catches up with you before you take the initiative to file, they can deny you the option to take the foreign earned income exclusion. This may result in a much higher tax bill than if you had gone ahead and filed on your own initiative. If you have unpaid taxes lurking in your past, get caught up before the IRS notices and the problem gets worse!
How do I qualify for the Foreign Earned Income Exclusion?
(Summarized from IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad.) For a more detailed explanation, go to our Foreign Earned Income Exclusion page. To exclude up to $108,700 per person (for 2021) of your foreign earned income from US income tax, US citizens must meet three requirements. (For US resident aliens, the rules are slightly different.)
- Your “tax home” must be in a foreign country. (Your “tax home” is the general area of your main place of business, employment, or post of duty. It is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual.)
- You must have foreign earned income. See below, “What does ‘earned income’ include?” Note that foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees.
- You must pass the “bona fide residence” test or “physical presence” test, described below.
Bona Fide Residence Test
To qualify as a bona fide resident of a foreign country, you must live and work in a foreign country or countries for an uninterrupted period that includes an entire tax year. However, living overseas for a full year is not sufficient for establishing bona fide residence. The determination is based on your actions and intentions with regard to the ties you set up in your foreign post, the conditions of your employment, and so forth. The IRS makes this determination based on your answers to Form 2555, the foreign earned income exclusion. OTS can help you determine whether you will qualify.
Once you have been living overseas for an entire tax year and have established bona fide residency, the status extends back to the date you established that residency and forward to the date you leave. See the section above on extensions, for the practical implications of this.
Physical Presence Test
You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive. This test is based only on how long you stay in a foreign country or countries and does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad.
What does “earned income” include?
Income that must be reported, even if eligible for the Foreign Earned Income Exclusion, comprises more than just salary. Earned income includes as well: commissions, bonuses, professional fees, tips, the fair market value of lodging, meals, or use of a car provided by your employer; cost of living allowances; overseas differential; family allowance; moving expense allowance or reimbursement (as of 2018); education allowance or reimbursement (unless you are employed by the school concerned); home leave allowance, and housing allowance. Some other types of income such as business profits, rents, and scholarships may be considered earned income as well, depending on the situation.
What if I earned more than $108,700 for 2021?
If you qualify for the full $108,700 exclusion but earned more than that, the amount over $108,700 may be subject to income tax. However, your standard or itemized deductions and other deductions and credits will affect how much tax, if any, you actually owe. If you are paying foreign income taxes, this will affect your results as well. (See “What is the Foreign Tax Credit?” below.)
Overseas Tax Services focuses primarily on moderate-income overseas taxpayers. If you are earning significantly more than $108,700 per year, your tax situation may in some cases be fairly complicated. If that is the case, we may advise you work with another firm.
What is the Foreign Tax Credit?
If you pay income taxes to a foreign government, you may be able to take a credit for those taxes against your US income tax bill. This is to save you being taxed twice on the same income. As a practical matter, if your income is fully excludable under the Foreign Earned Income Exclusion, such that you owe no US income tax, then the Foreign Tax Credit may be irrelevant. (It can be used to reduce your tax bill, but only to zero. It cannot be claimed as a refund.) There are some circumstances where you may be better off taking the Foreign Tax Credit instead of, or in addition to, the Foreign Earned Income Exclusion. OTS will look at your situation to determine if you would benefit from this option or not.
Do I need to report money I have in a foreign bank or financial account?
Possibly. If your balance in foreign financial accounts totals over $10,000 at any time during the tax year, you are required to report each account to the US Treasury annually on a special form. In addition, you are required to report your worldwide income, whatever the source. So if, for example, you earn interest or dividends from a foreign account, this must be reported with the rest of your income. Finally, if you have signatory authority over someone else’s foreign account (e.g. for your employer), you must report that as well.
What do I need to know about Social Security?
If you work overseas for a foreign employer, neither you nor your employer will be paying into the US Social Security system. (i.e. no FICA taxes will be withheld from your pay, nor paid on your behalf.) You are not permitted to pay in voluntarily. Therefore, be sure to plan ahead for your retirement. If you work overseas for much of your career, you may find that you are eligible for little or no US Social Security benefits.
What do I need to know about Individual Retirement Accounts (IRAs)?
If all of your income is excluded under the Foreign Earned Income Exclusion, it is likely that you will not be eligible to contribute to an IRA. Many financial advisors in the US are not aware of this. Check out our IRA Information page to learn more about who can contribute and what to do if you contributed when you shouldn’t have.
What do I need to know about the Affordable Care Act (“Obamacare”)?
The penalty for not having health insurance expired at the end of 2018. For tax years through 2018, even if you lived overseas, as a US citizen you were subject to this law and were probably required to have health insurance. However, there are some special allowances for those living outside the US. Check out our Affordable Care Act page to learn more.
What happens if I want to take a “gap year”?
If you are thinking of taking some time off from working overseas, please have a look at our Gap Year page to learn about some of the tax implications.
What do I need to know about recent tax law changes?
The Tax Cuts and Jobs Act (TCJA) passed in December 2018, along with additional measures passed in December 2019, made numerous changes to the tax law. See our Recent Tax Law Changes page for highlights.
