American citizens and Green card holders living overseas need to file their tax returns just like other Americans would. It does not matter where they draw their income from, the taxes must be filed! Here is what such expats should pay heed to while filing their 2021 returns in 2022.
Whom do these apply to?
These rules and requirements apply to US citizens and Resident aliens who work overseas.
You are a US citizen if you were born in the US or its territories and have a birth certificate issued by a US state. You may also have a “derived citizenship” if one of your biological parents is a US-born citizen and lived in the US before your birth. You may also have a “derived citizenship” if both your parents naturalized to US citizenship before you turned 18.
You are a Resident alien if you are not a citizen but satisfy either the green card test or the substantial presence test for the calendar year.
- Green card test – a lawful permanent resident of the US at any time during the calendar year.
- Substantial presence test –physically present in the US for 31 days during the calendar year and a total of 183 days during the current year and preceding 2 years (1/3rd days in the first preceding year and 1/6th in the second preceding year)
Your income, filing status, and age determine whether you must file a return. Form 1040 is the standard form that IRS requires all American taxpayers to pay regardless of where they live, within the American borders, or overseas. Wages, salary, taxable interest, capital gains- all of them must be reported in this form. The deadline for this April 18, 2022. You can request an automatic extension of six months using Form 4868.
FBAR needs to be filed if you have authority over at least one financial account which is located outside the borders of the US and whose value exceeds $10,000 at any given time in the year. The due date is April 15, 2022, with an automatic extension until October 15, 2022.
Form 8938 may need to be filed depending on the assets you hold and their Fair Market Value.
The above-mentioned forms are the basic ones that have remained unchanged for the 2021 tax year.
In 2021 (for filing 2020 returns), an extension until May 15 was applicable. The extension is NOT applicable this year. But expats specifically get an extension until June 15.
What is new or what has changed
- Standard deductions – A standard deduction is the amount that is deducted from the gross salary and can be claimed as an exemption. It can be used to reduce the tax bill without having to itemize the deductions. It is adjusted each year for inflation and also depends on the income you make and your filing status. For the tax year 2021, it has increased for all filers.
|Filing status||Deduction amount|
|Single and Married filing separately||$12,550|
|Married filing jointly and Qualifying widow(er)||$25,100|
|Head of household||$18,800|
- IRA limitations – If you are covered by a retirement plan and your 2021 MAGI (Modified Adjusted Gross Income) is less than $76,000 ($125,000 if married filing jointly or qualifying widow(er)) then you can take an IRA deduction. If your spouse is covered by a retirement plan, but you are not, you can take an IRA deduction if your 2021 MAGI is less than $208,000. These limits have changed since 2020.
- Foreign earned income exclusion– Employers do not have to withhold US income taxes on wages earned overseas. A statement must be given to the employer indicating that you expect to qualify for the FEIE. This FEIE amount also changes because of inflation. For the tax year 2021, the amount stands at $108,700.
- Foreign Housing Exclusion – Since this is calculated as 16% of the above-mentioned FEIE, the housing exclusion amount also changes. For 2021, this amount is $47.64 per day i.e.,$17,392 per year.
- The deduction for moving expenses is also suspended unless you are a member of the US Armed Forces who move due to a military order.
Some key taxes and filing reminders
- Self-employment tax – This is a Social Security and Medicare tax that applies to the net earnings from self-employment. If your net earnings are at least $400, then this tax must be paid. The US has agreements with various countries to help its citizens avoid dual taxation to social security systems for the same work. The general thumb of rule is that a self-employed person will be covered by the social security system of the country that they reside in. But if your self-employment earnings are exempt from foreign social security taxes and are subject only to US self-employment taxes, then you must get a certificate of coverage from US SSA’s Office of Earnings and International Operations.
For the tax year 2021, the maximum amount of your net earnings that is subject to the social security portion of the self-employment tax is $142,800. This means that 6.2% tax rate will be applied on the first $142,800 (6.2% of $142,800 = $8,853.6)
For the Medicare portion of the tax, there is no such maximum amount and the entirety of the earnings are applicable. Additional Medicare will apply if the net earnings exceed a certain threshold amount depending on your filing status. 1.45% will be applied on the first $200,000 of the net earnings, and an additional 2.35% on all amounts in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing a separate return)
Also, if you took the deferral that was available to self-employed individuals under the CARES Act, the deferred amount must be paid by December 2022.
- Generally, a withholding tax of flat 30% is applied when a payment (US source dividends or royalties) is made to non-resident aliens. However, due to human error, a US citizen or resident alien can also be subjected to this 30% rate because of a foreign address. If this happens to you, you must notify the payer of this immediately. Form W-9 can be used to do this. The withheld tax can be claimed as a withholding credit on your tax return.
- All amounts on our tax returns must be in USD. The exchange rate that is prevailing when you receive, pay or accrue them must be used to convert from the foreign currency to USD.
Due to restrictions, if your income is not fully convertible to USD then your income is “blocked” or “deferrable”. This income can be reported once it becomes unblocked. For this, you must file an information return mentioning the income in foreign currency along with your tax return.
- You may have to file Form 8938 if you have foreign financial assets.
- The tax shown on your return should be paid by the due date of your return. If you have a US account, you can make the payment using the Electronic Federal Tax Payment System, by Federal Tax Collection Service, or by credit card/debit card. If you do not have a US bank account, you can ask your financial institution if they have a US affiliate that can make same-day transfers. If you pay the taxes due after the regular due date, then interest will be charged from the regular due date to the date the tax was paid.
- There are 4 types of extensions you can get.
- Automatic 2-month extension- applies if you are living outside the US and Puerto Rico and the main place of residence is outside the US or Puerto Rico on the filing due date. It also applies if you are married filing jointly
- Automatic 6-month extension –The 2-month and the 6-month extensions start at the same time. You have to request the additional 4 months by the new due date allowed by the 2-month extension. Form 4868 can be used for this.
- Additional extension for taxpayers outside the country – a discretionary 2-month additional extension time can be requested by taxpayers outside the country. A letter must be sent to the IRS explaining the reasons for requiring an extension.
- Extension of time to meet residency tests –You can get this extension only if you need time to satisfy the bona fide residence test or physical presence test to qualify for the FEIE (if you are unable to satisfy the requirements for the test, then you must immediately file your returns as interest will be levied on the tax due)
- If you do not pay your taxes and have a tax debt, then the IRS notifies the State Department of this and they can avoid issuing or renewing the passport of such a taxpayer.
You are advised to use the service of a CFO consultancy service to make sure you pay your dues and file your returns on time and avoid paying any interest on the tax due.