US citizens living abroad have an obligation to file a tax return each year. This is an important responsibility that can sometimes be overlooked while adapting to a new language, dealing with foreign bureaucracies, and making new friends.
It’s something that can even affect individuals born to Americans living abroad who have spent minimal time in the United States.
Thankfully, the IRS is aware of this, and there is a way for those who are behind on their US taxes overseas to catch up. In partnership with tax specialists 1040 Abroad, we take you through the 4 steps you’ll need to take to catch up and even get a payout.
- Make sure you’re eligible
The mechanism by which US citizens abroad can catch up with their taxes is known as the Streamlined Foreign Offshore Procedure, and the good news is that you won’t be penalized, as long as you meet certain criteria.
The first requirement is quite simple: You must have met the physical presence test of the Foreign Earned Income Exclusion for one of the past 3 years, meaning that you would have spent at least 330 days outside the country in at least one of the last three years.
You will need a Tax Identification Number (TIN), which for most Americans is their Social Security Number (SSN).
Next, you must be prepared to file at least three years of federal tax returns and six years of Report of Foreign Bank and Financial Accounts (FBAR) forms with the IRS.
You will also need to certify through a declaration that the failure to file your taxes was ‘non-wilful’, meaning you forgot or were unaware of the obligation to do your taxes each year while abroad.
You won’t be eligible to use the Streamlined Procedures if the IRS has already contacted you, or launched an investigation into your taxes.
- Gather the information you need
Depending on your circumstances, there are a few types of information that you may need.
It’s a good idea to have the last year of filed taxes handy – but we’ll get to why in a few moments.
Documentation of your income is one kind that everyone filing their tax return will need to have at hand. This will be a W2 if you’re working for a US-based employer.
If you are drawing income from any other sources, such as rental properties or winnings, you’ll need to have records of those handy, for filling out your 1099-MISC form, or your 1099-DIV form if you own stocks.
Foreign income, for which a US tax slip wouldn’t have been issued, would also be reported.
It’s important to remember that if you are being paid in a foreign currency, you’ll need to be able to convert the sums involved when filling out the associated forms. If working with 1040 Abroad, you can provide the information in local currency and 1040 Abroad will take care of the rest.
To take advantage of the Foreign Earned Income Exclusion (FEIE) of up to $126,500, you must meet either the bona fide residence test or the physical presence test, if the latter, keep documentation (passport stamps, boarding pass) to document where you were on any given day. The FEIE can only be used to exclude foreign-earned income (wages and self-employment income).
There is also the obligation as part of the tax process for American citizens to file an FBAR if they have more than $10,000 across their foreign bank accounts.
Failure to do so can result in steep penalties if the IRS contacts you, so being able to check your balances and support your reporting with printed statements is crucial.
As with doing your taxes back home, it’s also important to have physical records of any work-related travel or other deductions that you are entitled to.
Finally, as an alternative to the FEIE, you can claim the Foreign Tax Credit (FTC), which would give you a dollar-for-dollar credit for taxes paid to a foreign country. You’ll need to be able to show your foreign tax return in the case of an audit.
- Leave it to the experts
The deadline to file your 2023 tax return was June 15, but it’s never too late to file it. Contact a tax professional such as 1040 Abroad for guidance. This has several benefits.
A good tax professional will ensure that you can use Streamlined Foreign Offshore Procedures to catch up and stay in good standing by identifying the key information they need to get taxes filed and acting swiftly.
Working with tax professionals will also ensure that you can claim everything that you are entitled to, via the FEIE, FTC and other taxation mechanisms that the IRS may not tell you about.
Most importantly, using a professional to catch up with your taxes gives you the benefit of time and peace of mind. It’s one less thing to worry about, and one that could no longer reemerge later to present a problem.
- (Potentially) Profit!
In addition to ensuring you claim every dollar back that you can, working with a tax professional can help you access funds that you are entitled to, and may be unaware of.
While the deadline for the first two stimulus checks from 2020 may have passed, you may be entitled to claim the third amount of $1,400 for each adult and dependent child on a late 2021 tax return.
This can be done through the Recovery Rebate Credit – and any good tax service will tell you that now is the time to act before the opportunity passes next year.
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