Don’t Forget About These 6 Common Expat Tax Forms
As a U.S. citizen living abroad, did you know you’re still required to file a U.S. income tax return to report your worldwide income each year? But with so many different tax forms, which ones apply to your particular situation?
Filing a U.S. tax return can be a complex undertaking, especially for Americans living abroad, who are often required to complete more specialized forms than U.S. residents. Here, we highlight six important U.S. tax forms that can help you avoid costly penalties and take full advantage of the tax deductions and credits available to you.
#1 – Form 2555: Foreign Earned Income Exclusion (FEIE)
If you live and work abroad for at least a year, you may be eligible to exclude up to $120,000 of your foreign-earned income from U.S. taxation in 2023. Form 2555 is important because it allows you to avoid double taxation on your income.
In addition to your foreign earned income exclusion, Form 2555 also calculates the amount of foreign housing expenses you may be able to exclude.
#2 – Form 1116: Foreign Tax Credit (FTC)
If you are ineligible to use the foreign earned income exclusion or have additional earned income above the FEIE limit, you may be eligible for foreign tax credits.
As a U.S. expat, you’re eligible to receive dollar-for-dollar credits on any taxes you paid on foreign-sourced income. You’ll use Form 1116 to calculate how much of your U.S. tax liability can be reduced, based on the taxes you already paid to your country of residence.
It’s important to note that you can’t use credits from income you’ve already excluded using Form 2555. Also, it’s typically unwise to switch between using the foreign earned income exclusion and the foreign tax credit. If you start and then stop using the foreign earned income exclusion, you must wait five years or apply to the IRS to begin using it again.
#3 – Form 8938: Statement of Specified Foreign Assets
Form 8938 provides the IRS with information about your bank accounts and foreign assets. This form is often referred to by the name of the legislation that created it as a requirement, the Foreign Account Tax Compliance Act (FATCA). Its goal is to prevent U.S. taxpayers from hiding assets overseas.
As an American expat, you’re required to file this tax form if your assets exceed a certain threshold, as indicated in the table below.
| AGGREGATE VALUE OF ALL SPECIFIED FOREIGN FINANCIAL ASSETS ON LAST DAY OF THE TAX YEAR IS MORE THAN: | OR AT ANY TIME DURING THE TAX YEAR IS MORE THAN: | |
|---|---|---|
| Unmarried taxpayers living in the U.S. | $50,000 | $75,000 |
| Married taxpayers filing a joint return and living in the U.S. | $100,000 | $150,000 |
| Married taxpayers filing separate returns and living in the U.S. | $50,000 | $75,000 |
| Unmarried taxpayers living abroad | $200,000 | $300,000 |
| Married taxpayers filing a joint return and living abroad | $400,000 | $600,000 |
| Married taxpayers filing separate returns and living abroad | $200,000 | $300,000 |
Source: IRS.gov
#4 – FinCEN Form 114: Foreign Bank Account Reporting (FBAR)
This form is required annually by the Financial Crimes Enforcement Center (FinCEN), a division of the U.S. Treasury Department. You must file this form if you hold (or have signatory authority over) foreign bank or investment accounts with an aggregate value of $10,000 or more. All U.S. citizens and permanent residents with a foreign account balance above the threshold must file Form 114, even minors.
#5 – Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company (PFIC)
If you own foreign or non-U.S. investment funds in accounts not covered by a tax treaty, you must file Form 8621 for each fund that is deemed at PFIC. This form provides information regarding any income or proceeds you received from these investments over the course of the year. Any income earned from a PFIC is taxable in the United States, even if it’s exempt from taxes in your current country of residence.
A tip about PFICs— steer clear! Form 8621 requires complex accounting and is very time consuming to complete. If you make a mistake, you face a high risk that the IRS will eventually uncover a lack of disclosure and impose tax, interest and penalty charges on your investment returns. It’s best to avoid PFICs all together and save yourself a lot of stress.
#6 – Form 3520: Reporting Foreign Trusts, Inheritances and Gifts for Americans Abroad
If you hold assets or receive a distribution from a foreign trust, you must file Form 3520. You must also file this form if you receive more than $100,000 in gifts from foreign entities or persons, including non-U.S. family members.
This is a complex form that’s several pages long and filed separately from your tax return (but due at the same time). If the form isn’t completed properly, you could be subject to penalties and fines, typically the greater of $10,000 or 5%-35% of the gross value of all assets not reported.
Feeling overwhelmed by all these tax forms? Creative Planning International is here for you. We work with U.S. expats and cross-border families to help maximize their wealth and avoid costly mistakes, especially when it comes to U.S. expat taxes and investments. We understand the complex interaction of multi-jurisdiction tax and regulatory regimes and take into account currency, diversification and other portfolio considerations as we help you plan and invest for the future.
If you’re an American living abroad who could use some help navigating your U.S. expat tax filing, request a meeting with a member of our team.
