Do US Citizens Abroad Pay US Tax (Definition & Examples)

Do US Citizens Abroad Pay US Tax

If a US citizen resides outside of the United States, they are still required to pay US tax on income they generate either in the United States or overseas. That is because the United States follows a worldwide income tax model – otherwise refer to Citizenship-Based Taxation (CBT). And, Citizenship-Based Taxation is a misnomer because it is not limited to us citizens, but actually applies to us citizens, Lawful Permanent Residents, and other foreign nationals who meet the Substantial Presence Test. It is important to note that just because a person resides overseas does not mean that they are no longer required to pay US tax. While a person who formally expatriates from the United States then they may be able to avoid paying US tax on any income that is not considered US-source, just being an expat is not enough to avoid filing US Taxes. Let’s take a brief look by example:

US Citizen with Foreign Income

Michelle is a US citizen who resides outside of the United States. She earns all her income from foreign sources and is tax compliant in the foreign country she resides. She has not filed US tax returns because she was under the impression that since all of her income is foreign and she resides outside of the United States, she does not have the file a US tax return, but that is incorrect.

US Tax Return and Reporting

Since Michelle is a US citizen, she is considered a US person even if she resides in a foreign country. Therefore, Michelle is still required to file a US tax return to report her worldwide income in accordance with CBT.

Tax Due Date 6/15

Because Michelle lives overseas, she can submit her tax return two months after the due date in June and not April. With that said, she should still pay her US taxes by April 15.

FBAR

Since Michelle is a US person and has foreign bank and financial accounts that exceed $10,000 in annual aggregate total, she is also required to file the annual FBAR. It does not matter that she resides overseas because the FBAR required by our US persons no matter where they reside. The form is filed electronically and on the FinCEN website (FBAR is not a “tax” form).

International Information Reporting Form

Michelle has some other international reporting requirements as well. Her aunt is a non-US person that left her an inheritance of $400,000 last year, so she is required to file Form 3520 to report a foreign gift. In addition, Michelle is a 53% owner of a foreign company and part owner of a family foreign trust, so she may also need to File Form 3520-A and Form 5471.

Foreign Earned Income Exclusion

Since Michelle resides outside of the United States for a majority of the year and met the Physical Presence Test, she should qualify for the Foreign Earned Income Exclusion which will allow her to exclude upwards of $110,000 of her foreign income US taxes — she may also be able to exclude some of her foreign housing.

Foreign Tax Credits (FTC)

Michelle has also paid a significant amount of tax in the foreign country on her passive earnings such as dividends and capital gains. Therefore, when Michelle files her US tax return, she may also qualify for certain foreign tax credits to reduce — if not eliminate — any double taxation. She would file Form 1116 to claim her individual foreign tax credits.

Streamlined Foreign Offshore Procedures

Since Michelle lives outside of the United States for more than 330 days, she should qualify for the Streamlined Foreign Offshore Procedures in order to get into compliance for prior-year non-filing. Michelle is non-waffle and under the Streamlined Foreign Program, all penalties including FBAR and FATCA should be waived.

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