Essential Tax Information for U.S. Citizens Living Abroad
Your Go-To Tax Resource for Expat Taxes.
U.S. citizens residing overseas have complex tax responsibilities and filing requirements. These citizens must comply with these obligations to avoid penalties and ensure proper reporting of income and foreign assets.
The IRS provides various exclusions and credits to mitigate the potential for double taxation and to recognize the unique circumstances of living abroad.
Understanding Your Tax Obligations
Basic Expat Requirements
U.S. citizens residing overseas must file federal income tax returns annually, reporting worldwide income regardless of their place of residence. This includes income from all sources, both domestic and international.
Required IRS Forms for US Citizens Living in the Caribbean
Form 1040: U.S. Individual Income Tax Return
Reports worldwide income for U.S. citizens.
Form 2555: Foreign Earned Income Exclusion
Allows eligible taxpayers to exclude a certain amount of foreign earned income from U.S. taxation.
Form 1116: Foreign Tax Credit
Provides a credit for foreign taxes paid on income that is also subject to U.S. taxation.
Form 8938: Statement of Specified Foreign Financial Assets
Required if foreign financial assets exceed specific thresholds.
FBAR (FinCEN Form 114): Report of Foreign Bank and Financial Accounts
( Mandatory if foreign bank accounts exceed $10,000 at any time during the calendar year. )
Reporting Foreign Income
Foreign Earned-income Exclusion
Eligibility Criteria
- Must meet the Bona Fide Residence Test or the Physical Presence Test.
- Requires a tax home in a foreign country.
Steps to Claim the Exclusion
Foreign Financial Asset Reporting:
Form 8938: Specified Foreign Financial Assets Reporting
- Required if specified foreign financial assets exceed the reporting threshold.
- Must be filed with your annual tax return.
FBAR (FinCEN Form 114): Foreign Bank Accounts Reporting
- Mandatory if the aggregate value of foreign bank accounts exceeds $10,000 at any time during the calendar year.
- Filed separately from your tax return through the Financial Crimes Enforcement Network (FinCEN).
Starting a US-based business while living abroad.
LLC Tax Obligations
Form 1065: U.S. Return of Partnership Income
- Filed if the LLC is treated as a partnership for tax purposes, reporting income, deductions, gains, and losses.
Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation
- Required for LLCs with foreign ownership to report transactions between the LLC and foreign owners.
Schedule C (Form 1040): Profit or Loss from Business
- Used by single-member LLCs (disregarded entities) to report profits and losses from business activities on the owner’s personal tax return.
S-Corp Tax Obligations
Form 1120S: U.S. Income Tax Return for an S Corporation
- Used to report the income, gains, losses, deductions, and credits of the S-Corporation.
Schedule K-1 (Form 1120S): Shareholder’s Share of Income, Deductions, Credits
- Provides each shareholder’s share of the corporation’s income, deductions, and credits.
Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations
- Required if you have a certain level of control or ownership in a foreign corporation.
Managing State-Specific Tax Obligations
Georgia State Tax Obligations
State Income Tax Returns
- Required for reporting income earned in Georgia on your state tax return.
- Filed by S-Corporations to report income, deductions, and credits specific to Georgia state tax.
Florida State Tax Obligations
- Applicable if your business has a tax home in Florida, requiring the filing of Florida Corporate Income/Franchise Tax Return.
Depending on the state and the nature of your business, you may need to register for state taxes, which could include sales tax, payroll tax, and others.
Additional Tax Considerations
- LLC members may be subject to self-employment tax on their earnings.
- S-Corporation owners may reduce self-employment tax by taking a reasonable salary and receiving dividends, which are not subject to self-employment tax.
Frequently Asked Questions FAQs
If you live in the Caribbean and haven’t filed taxes in years, you need take the following steps to Become Compliant with IRS Tax Filing Requirements:
- Determine Which Tax Returns Are Required:
Federal Income Tax Returns: File federal income tax returns annually. - Gather Financial Records:
Collect all necessary financial records for the years you have not filed. - Calculate Income and Expenses:
Calculate your income and expenses for each year you have not filed. - File Past Due Tax Returns:
Prepare and file all past-due federal income tax returns. - Address Any Taxes Owed:
Consider setting up a payment plan with the IRS. - Check State Tax Obligations:
- Consider Streamlined Procedures:
Use the IRS Streamlined Filing Compliance Procedures for non-willful non-compliance. - Seek Assistance if Needed:
Consider working with GGW, a CPA firm specializing in filing back taxes for US citizens living abroad. using IRS-approved tax software or services.
To claim the Foreign Earned Income Exclusion:
- You must be eligible and have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test.
- Steps to Claim:
- Determine eligibility.
- Complete Form 2555, providing information about your foreign residence and income.
- Attach Form 2555 to your Form 1040 when filing your U.S. tax return.
- Form 2555
The key differences between the FBAR (FinCEN 114) and 8938 (FATCA) are as follows:
- The FBAR is filed separately from the tax return and directly with FinCEN, whereas Form 8938 is filed with the IRS as part of the tax return.
- The asset types and reporting thresholds differ between the two forms.
- Penalties for non-compliance can vary between the two reporting requirements.
FBAR (FinCEN Form 114):
- Thresholds for Filing: Aggregate value of foreign financial accounts exceeds $10,000 at any time during the calendar year.
- Types of Assets to Report: Bank accounts, brokerage accounts, mutual funds, trusts, or other types of foreign financial accounts.
- Filing Location: Filed electronically through the Financial Crimes Enforcement Network's (FinCEN) BSA E-Filing System, not with the IRS.
- Penalties for Non-Compliance: Non-willful violations can result in a penalty of up to $10,000 per violation. Willful violations may result in a penalty of the greater of $100,000 or 50% of the account balances; criminal penalties may also apply.
- Additional Information: FBAR is not part of the tax return and is due April 15, with an automatic extension to October 15. No need to request an extension.
For more detailed information, please refer to the IRS guidance on FBAR.
Form 8938 (FATCA):
- Thresholds for Filing:
- Single or filing separately: More than $200,000 of specified foreign financial assets on the last day of the tax year or more than $300,000 at any time during the year.
- Married filing jointly: More than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
- These thresholds are higher for U.S. citizens living abroad.
- Types of Assets to Report: Includes financial accounts and non-account assets held for investment such as stocks, bonds, and interests in foreign entities.
- Filing Location: Filed with the IRS as part of the individual's tax return.
- Penalties for Non-Compliance: Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply.
- Additional Information: Form 8938 is part of the tax return and must be filed by the due date (including extensions) of the tax return.
For a U.S. citizen residing overseas who owns an S-corporation, the following IRS forms are generally required:
- Form 1120S: U.S. Income Tax Return for an S Corporation, to report the income, gains, losses, deductions, and credits of the corporation.
- Schedule K-1 (Form 1120S): Shareholder's Share of Income, Deductions, Credits, etc., provided to each shareholder to report their share of the corporation's income.
For a single-member LLC that has elected to be treated as an S-corporation, the following forms are required:
- Form 1120S: Filed annually to report the S-corporation's income, gains, losses, deductions, and credits.
- Schedule K-1 (Form 1120S): Used to report the shareholder's share of income, deductions, and credits.
- Form 2553: Filed to elect to be treated as an S-corporation.
For a U.S. citizen residing overseas who owns an S-corporation, the following IRS forms are generally required:
- Form 1120S: U.S. Income Tax Return for an S Corporation, to report the income, gains, losses, deductions, and credits of the corporation.
- Schedule K-1 (Form 1120S): Shareholder's Share of Income, Deductions, Credits, etc., provided to each shareholder to report their share of the corporation's income.