While many Americans abroad wonder if they have to pay US taxes on foreign income, the real question is about filing tax return itself. Many of US citizens living overseas do not owe any taxes to IRS. However, it doesn’t mean they don’t have to report their income on Form 1040. Majority of US expats confuse the filing threshold with Foreign Earned Income Exclusion. The latter one doesn’t determine your filing liabilities. It is there to exclude all or part of your foreign-source wages and self-employment income from U.S. federal income tax. Yet you need to file federal tax return and form 2555 to use Foreign Earned Income Exclusion.
There are a few things to remember about US tax filing obligations. First of all, determine if you are a U.S. person for tax purposes, as you do not necessarily need to have a US passport to possibly have US tax filing obligations. You may even need to file even if you don’t earn any money yet you are married to someone who has income. Yes, we know that US taxes can be quite complicated!
Tax Tip 1: Even though we have already mentioned FEIE above, don’t rush to select Foreign Earned Income Exclusion on your US expat tax return. In many cases, choosing Foreign Tax Credit is more beneficial. Tax professionals prefer the latter for a number of reasons.
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