Living outside the United States does not eliminate your US tax obligations. US citizens and green card holders abroad must file a US tax return every year and may also need to file additional reports on foreign assets and accounts. Here is an overview of the key forms, what they cover, and how they interact.
Table of contents:
Foreign Earned Income Exclusion (FEIE) Foreign Tax Credits (FTC) Information Reporting and FBAR Tax Preparation Software
Foreign Earned Income Exclusion (FEIE)
Is my foreign income automatically exempt from US reporting?
No. A common misconception is that foreign income is exempt because it can be excluded. Foreign earned income is not exempt. You must report it on a US tax return, and you must be a qualifying individual to elect the exclusion.
What types of income qualify for the exclusion on Form 2555?
The exclusion is available only for “earned” income. It cannot be used for passive investment income such as dividends, interest, or capital gains.
Foreign Tax Credits (FTC)
How does a Foreign Tax Credit work?
A Foreign Tax Credit provides a dollar-for-dollar reduction, subject to limitations, of your US federal tax burden for income taxes you paid to another country on income sourced there. It is claimed on Form 1116.
Can I claim both the FEIE and the Foreign Tax Credit?
No. Once you choose to exclude foreign earned income or housing costs, you cannot take a foreign tax credit on that same income. If you do take the credit, your previous choice to exclude that income may be treated as revoked.
Are there different forms for lawful permanent residents (LPRs)?
US citizens and LPRs generally use Form 1040. However, LPRs residing in a country with a US income tax treaty may be eligible to file Form 1040NR as a non-resident.
Information Reporting and FBAR
What is Form 8938?
Form 8938 (Statement of Specified Foreign Financial Assets) is used to report specified foreign financial assets. It often overlaps with FBAR reporting and must be attached to your annual income tax return when filed with the IRS.
Who must file an FBAR (Form 114)?
US citizens and LPRs with a financial interest in or signature authority over foreign accounts must file a Foreign Bank Account Report (FBAR). The definitions of “ownership interest” and “signature authority” are interpreted very broadly under the regulations.
Where is the FBAR filed?
Unlike other tax forms, the FBAR is not filed with the IRS. You must file it electronically with FinCEN (the Financial Crimes Enforcement Network) through the BSA E-Filing System on Form 114.
What are the penalties for FBAR non-compliance?
The statutory penalty for failing to file, or filing late, is $10,000 per failure. If the failure to file was intentional, the penalty can increase to 50% of the account balances.
Tax Preparation Software
Can I use standard tax software for these international forms?
Often, no. Most tax preparation software does not support Form 8938 or other forms related to non-US assets. These forms frequently require manual completion using an Adobe Acrobat version of the form.