United States citizens, as well as people classified as resident aliens, are liable for U.S. income taxes, irrespective of where in the world the income is earned or where they are living. Simply put, it you are a citizen or resident alien living abroad, you must comply with the same filing requirements that you would face if you lived in the U.S. However, there are certain benefits that may accrue in special circumstances, in addition to the many areas that require your careful attention as usual.
For example, depending on your specific situation and filing requirements, you might be allowed to exclude a certain, limited part of your foreign income. You might also find that your housing costs can be deducted from your gross income, excluded or otherwise reduced. If you find that you are eligible for either, to claim them you have to file a return that includes Form 2555, Foreign Earned Income. To get the exclusion only, you might use the shorter Form 2555-EZ instead, which is called, sensibly enough, Foreign Earned Income Exclusion.
Other credits and deductions
It may be possible to get a tax credit, or an itemized deduction, to cover any foreign taxes you pay on your income. Interestingly, since the Constitution gives treaties a special standing in law, various tax treaties and conventions to which the U.S. is a signatory (along with many foreign nations) offer opportunities to reduce foreign tax liabilities. The requirements and legal issues can be complex at times, so when things begin to get complicated, you might consider consulting an expert in this kind of tax law.
You can also get the answers you need to most questions of this kind from the IRS itself. The IRS publishes thousands of guides for taxpayers, and Publications 54, 514 and 901 - Tax Guide for U.S. Citizens and Resident Aliens Abroad, Foreign Tax Credit for Individuals and U.S. Tax Treaties, respectively - provide copious amounts of information concerning how to treat foreign income, understand the foreign tax credit and discover how tax treaties may benefit you in your particular situation.
Filing requirements
For resident aliens in foreign countries, as well as American citizens living abroad, the filing requirements are essentially the same as if they were living in the U.S. To find out if you have to file, you consider the same things wherever you are living - namely, filing status, your age, gross income from all sources and your dependent status (being claimed by another taxpayer on his or her return).
When determining if you meet the gross income requirement, make sure to include all the income you receive, from both foreign and U.S. sources. This is required even if that income gets paid in foreign currency, the foreign country where you are living taxes the income or the income can (later) be excluded with the foreign earned income exclusion.
Self-employed people
If you are self-employed you must file a U.S. tax return if you earn at least $400 in net profits from self-employment, and your age is irrelevant. These net earnings from your self-employment must include all income, whether it is earned in a foreign nation or in the United States. Even if you earn it all in a foreign country, or it is all excludable as foreign earned income when calculating your tax, you still have to pay self-employment tax on the income.
Deadlines, penalties, exceptions
If you are like the majority of tax filers, you will be using the calendar year as the tax year and will therefore have the usual April 15 deadline for filing taxes on the preceding year. You can apply for an extension just as if you were living in the States, but you will have to remit the tax you estimate is due when you file the Form 4868 extension request. In fact, in the overwhelming majority of instances you will be subject to the same filing requirements, deadlines, penalties and interest as citizens and resident aliens filing in the U.S.
There are a number of special situations that arise with armed service personnel, some civilian government employees and others. You need to review the IRS publications that pertain to your particular circumstances, beginning with the three main guidebooks mentioned previously. If you have difficulty determining the correct course of action, you should definitely acquire the services of a tax professional with specific, recent experience dealing with resident aliens and U.S. citizens living abroad. Filing taxes is a serious undertaking, and more than most activities in life, it benefits you greatly to get things right the first time. Don't proceed if you are uncertain, as it will cost you much more that way than doing it correctly with professional assistance.
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