Understanding Tax Obligations for U.S. Citizens Abroad
If you’re a U.S. citizen or resident alien living abroad, it’s important to understand your tax obligations and FBAR requirements. You must pay U.S. income tax on your worldwide income, including wages, unearned income, and tips, regardless of where you earn it. This means you also have the same tax filing requirements as U.S. citizens and residents living in the United States.
Claiming Tax Benefits When Filing a U.S. Income Tax Return
Even if you qualify for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, you must still file a U.S. income tax return to receive them. These benefits only apply if eligible taxpayers file a tax return.
Tax Filing Extensions for U.S. Citizens Living Abroad
If you’re living outside the U.S. or Puerto Rico, you have an automatic two-month extension to file your tax return until June 15, 2023. However, you still need to pay interest on any unpaid tax by the regular due date of April 18, 2023. Military personnel serving abroad also qualify for this extension, and taxpayers must attach a statement to their tax return if this applies to them.
Reporting Foreign Assets and Accounts
Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and bank and other financial accounts. To do this, affected taxpayers usually attach Schedule B to their federal return to report foreign assets. The third part of Schedule B asks about foreign accounts, and taxpayers must report the country in which each account is located.
Additional Reporting Requirements: Form 8938 and FBAR
If the total value of foreign financial assets exceeds certain thresholds, some taxpayers may also need to attach Form 8938 to their return to report specified foreign financial assets. Additionally, U.S. persons with an interest in or signature or other authority over foreign financial accounts where the total value exceeded $10,000 at any time during 2022 must file a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department.
Filing Requirements for FBAR
U.S. persons, including citizens, residents, corporations, partnerships, limited liability companies, trusts, and estates, must file an FBAR if they have:
- A financial interest in or signature or other authority over at least one financial account located outside the United States, and
- The aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
Generally, an account at a financial institution located outside the United States is considered a foreign financial account, regardless of whether the account produced taxable income.
However, you don’t need to report foreign financial accounts that are:
- Correspondent/Nostro accounts,
- Owned by a governmental entity,
- Owned by an international financial institution,
- Maintained on a U.S. military banking facility,
- Held in an individual retirement account (IRA) of which you’re an owner or beneficiary,
- Held in a retirement plan of which you’re a participant or beneficiary, or
- Part of a trust of which you’re a beneficiary, if a U.S. person (trust, trustee of the trust, or agent of the trust) files an FBAR reporting these accounts.
FBAR Record-keeping Requirements
Maintain records for each account reported on an FBAR, including the following information:
- Name on the account,
- Account number,
- Name and address of the foreign bank,
- Type of account, and
- Maximum value during the year.
The law does not specify the type of document required to store this information. Acceptable documents may include bank statements or a copy of a filed FBAR containing the necessary information.
In general, keep these records for five years from the FBAR’s due date.
Meeting Deadlines and Avoiding Penalties
The deadline for filing the annual FBAR is April 18, 2023, but U.S. persons who miss this deadline have an automatic extension until Oct. 16, 2023, to file the FBAR. It’s important to keep up with these requirements to avoid any potential penalties or legal issues. If you have questions or concerns about filing your taxes while living abroad, refer to the instructions for Form 1040 and Form 1040-SR, Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 519, U.S. Tax Guide for Aliens.
Need Help Filing?
If you’re living abroad and are confused about filing your taxes, GreenGrowth CPAs can help! We have several financial programs to assist companies and individuals with their fiscal responsibilities, including tax planning and compliance, accounting & finance support, audit preparation, tax controversy support, and much more.