THE TRANSATLANTIC MAGAZINE
America’s unusual, citizenship-based taxation system means that all Americans, including expats, are required to file US taxes every year. This is still the case for expats who pay foreign taxes in another country too, or if there’s a tax treaty in place between the US and their country of residence. In this article, we’ll take a look at what’s new for Americans filing US taxes for abroad in 2021.
Filing requirements remain broadly the same for Americans living abroad in 2021 as in 2020: they still have to file a federal US tax return, reporting their worldwide income. Some expats may have to file a State tax return from abroad too, depending on when and whether they intend to return, what ties they have there, and the particular rules in the state where they last lived.
In 2020, due to the pandemic, all Americans received a three month filing and tax paying extension until July 15. In 2021, as vaccines are rolled out, it’s unlikely that this will be repeated, meaning that the filing deadline for expats will revert to June 15 (although any US tax payable will be due on April 15). Expats can also apply for an extension until October 15 by filing Form 4868.
Americans with foreign financial accounts, assets and business interests may also have to report them. The requirement to report foreign bank, investment and personal pension accounts by filing a Foreign Bank Account Report (FBAR) is a common one for expats, and the effective deadline in 2021 is October 15.
In August 2020, the IRS released a draft of a new Form 1040 for tax filing in 2021. The new form is no longer postcard sized, but neither is it as big as the old Form 1040 was before the 2017 Tax Reform. One notable addition is a question about cryptocurrency on the first page of the main form. Most expats use an expat tax preparer, so they won’t notice the new Form 1040 layout though.
The Foreign Earned Income Exclusion lets Americans abroad reduce their US tax bill by excluding their earned income from US tax.
To claim the Foreign Earned Income, expats must file Form 2555 and prove they meet one of two US tests for living abroad. These are the Bona Fide Residence Test, and the Physical Presence Test, which involves proving you were outside the US for at least 330 days in a 365-day period (normally the tax year, unless you moved abroad mid-year).
By claiming the Foreign Earned Income Exclusion, expats can exclude their earned income up to a limit which for 2020 is $107,600.
However, expats who pay foreign taxes in their country of residence at a higher rate than the US income tax rate often benefit from claiming the US Foreign Tax Credit instead. This provides US tax credits to the same value as foreign taxes paid. It can be claimed on Form 1116.
The new administration has plans to introduce a number of new taxes which will affect many expats. Because most expats claim either the Foreign Tax Credit or the Foreign Earned Income Exclusion when they file their US federal return from abroad, they won’t feel any increases to personal income taxes. Americans who have a foreign registered business on the other hand will most likely be subject to higher corporate taxes.
However, any tax increases are probably dependent on the Democrats winning both senate seats in the state of Georgia in early January 2021, which would give them control of the senate.
Americans who live abroad but haven’t been filing US taxes because they didn’t know they had to can catch up voluntarily under an IRS amnesty program called the Streamlined Procedures without facing back taxes and penalties.
Almost all expats other than those with the most simple financial circumstances benefit from consulting an expat tax specialist, who can advise them on the most tax-efficient way to file and ensure that they are fully compliant with their obligations.
Katelynn Minott is a Managing CPA and Partner at Bright!Tax (brighttax.com), the award-winning, specialist provider of expat tax services for Americans living abroad. If you require any assistance with your US taxes, get in touch at firstname.lastname@example.org.