Income Tax Filing Guide for American Expats Abroad

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Being an American Expat abroad can be a scary prospect when it comes to taxes. Worldwide banks have implemented FACTA reporting which means that big brother knows how much money you have overseas for accounts you opened using your American passport. Also, the USA is one of the few countries that exercises a worldwide tax system. 

But don’t let those things get you down! The overseas exemption is pretty high (102,000 USD as of 2017) and if you make more than that you should be investing some money into to a professional to do your taxes for you anyway. If you are making lower than that, filing your taxes is easy!
Also there is the foreign income tax credit and the additional child tax credit which can help to cancel out any tax payable. 
 
You may try to file taxes online using Turbo Tax or something similar, but once you declare you have an overseas bank account, you will run yourself into trouble. The tax software will only be able to process this if you pay an extra $50 or something for the “professional version.” Who wants to pay $50 on a tax form that you are declaring nothing on, right?
 
The simple and free solution is to send in your tax form via pencil and paper. The government has made this relatively simple for us foreigners abroad. And they give us an extra 3 months to file! Below is a rough guide on completing your taxes via pencil and paper from overseas.

Deadlines:

The expat deadline for filing taxes from overseas is automatically moved back to June 15th of the following year. But you can use form 4868 to extend the filing date to October 15.
 
Paper and Pencil Tax Filing Guide

Disclaimer: I am not a professional in US tax. Below is simple a guide that follows the tax instructions given by the IRS. If you have complex overseas tax issues, I would suggest you seek professional advice. If you file yourself, you need to read the IRS instructions carefully and make sure you do not misreport anything. I cannot take responsibility for any tax misfiling on your part..
 
With that in mind, I am going to assume that you are:

• Single or have a foreign spouse with no US children.
• You own an overseas bank account
• You make less than the equivalent of 102,100 USD a year
• You don’t have any US income to declare

If you do have children, then I do not recommend claiming for foreign income tax exclusion. You should file form 1116 foreign income tax credit and schedule 8812 the additional child tax credit. In most circumstances with children you will be receiving a tax refund without any tax payable. 

I will walk you through the following 6 steps:

1. Fill Out Schedule B of Form 1040
2. Start filling out Form 1040
3. Fill out Form 2555 – EZ
4. Fill out Form 8965
5. Finish Form 1040
6. Correct Mistakes With Form 1040X

Bonus steps if you will not use the foreign income exclusion:
1. Fill out form 1116
2. Fill out schedule 8812
3. Fill out schedule 3
 
Step 1: Fill Out Schedule B of Form 1040

Yes, before you even start on Form 1040, you need to begin with Schedule B of Form 1040. This is because you have a foreign bank account; you must declare it as well as other foreign assets. Because of FACTA, the US has forced banks worldwide to share the account information of American citizens. Big brother knows, so you might as well declare. 
Click here for Schedule B instructions and here for the Schedule B itself. Be sure to print it out and read the instructions carefully.

Just so you know, you can fill out these forms via PDF on your computer. No need to print them out and write by hand like a cave man.​
Skip parts I and II. On part three, you should check "Yes" for 7a. Do you need to check yes for 7b and 8? Let’s see: 

If your account had over 10,000 in an account during a calendar year (you may have), then you need to fileFinCEN form 114. You may also need to fill out form 8938 if you own other foreign financial assets. Otherwise check no for 7b and 8.

If you want to avoid this crap, then send your money back home or keep it with your foreign spouse. I’m not going to go on to FinCEN form 114, but it’s not that hard to figure out and your income derived from foreign assets can also be included in the foreign income exemption.
  
Step 2: Start Filling out Form 1040
​
The second thing you need to do is go download the 1040 form and print it out. Click here for From 1040 instructions and here for the 1040 itself. Be sure to read the instructions carefully.

​First you need to fill in our personal info. Fill in your foreign address as your home address. Write in the country you live in.
On line 7, write in your USD equivalent foreign income. Don’t try to skip this part. It’s okay because it will go away after the foreign exemption.

You have no income from the USA. But you have other income. Now is the time to fill out form 2555 – EZ
 
Step 3: Fill out Form 2555 – EZ
 
Click here for From 2555-EZ instructions and here for the From 2555-EZ itself. Be sure print it out and read the instructions carefully.

Form 2555-EZ is important because it will:

• Calculate your overseas exemption
• If you meet the Bona Fide Residence (being a tax resident of another country, for Taiwan this means staying in Taiwan over 183 days in a tax year) or Physical Presence test (of being overseas exemption over 330 days) you can then also be exempt from paying the penalty for not having health insurance under the individual mandate. But you must also fill out form 8965. Cue eye roll.
• If you were only in the USA for half a year, or were not a tax resident of another country, then you will be exempted from some income but not from the affordable health care act individual mandate.

Write in the dates you were not in the USA and calculate the days to see if you meet either test. If you meet the Bona Fide Residence Test or the Physical Prescience Test then woohoo! You can take the foreign earned income exclusion!

​Next write in the days you were in the USA and the money you earned (I assume you earned none). 

Finally, you need to figure out how big your exclusion is. If you were overseas for 365 days, then you can get a maximum of 102,100 USD exclusion.
For instance, I stayed overseas for 357 days. I divide 365 by this number: 365/357= .978. I then multiply this decimal by 102,100, so my exclusion is 99,853.
​Then write your foreign income in USD, and I am assuming that it is less than your exclusion. If not, you will be subject to pay tax on the amount that exceeds the exclusion.
 
Step 4: Fill out Form 8965

Click here for From 8965 instructions and here for the From 8965 itself. Be sure print it out and read the instructions carefully.

Although it doesn't explicitly tell you on the Form 1040 instructions to fill out this form, you can find that this is a requirement by searching the health care exemption requirements on the IRS website: www.irs.gov/pub/irs-pdf/p5187.pdff 

So as you can see above, form 2555-EZ is not enough to prove you do not need to pay for healthcare. You also need to fill in the 8965 form as well.

So what kind of health care exemption cod should you write on the form? If you were outside of the US for at least 330 days in a year, your exemption code is "c." 

Can't I just count Taiwan's or another country's health insurance as coverage? No! Taiwan is not considered minimal essential coverage, and very few insurance plans outside the USA are, as you can see in this report.

Start filling in form 8965. ​Write your name and the months you had coverage. If you were in the US for a few months, you need to calculate that and enter in the health insurance calculation (see form8695 instructions for more details).

If you are claiming a coverage exemption, all you need to do is attach this form to your 1040. You don’t check box 61 on Form 1040.
 
This step was a pain in the butt. But the good thing is this is requirement will be gone next year thanks to the abolition of the individual mandate! Trump has done something right during his presidency.
 
Step 5: Finish Form 1040

​On form 2555-EZ it will tell you to write your foreign income in parentheses and Form 2555-EZ on line 21 of From 1040. Write the excluded foreign income in parentheses on line 21 (this means its negative). If your income exceeded the foreign exclusion, then write the foreign exclusion amount. If your income was 20,000 USD and your exclusion was (20,000) the total (20,000-20,000) is zero.
 
If you are claiming a health coverage exemption, all you need to do is attach the completed form 8965 to your 1040. You don’t check box 61 on Form 1040.

Next write zeros, sign the 1040 form and give some basic info. You’re done with Form 1040!
 
Now you can mail in your tax return and breathe a sigh of relief. Remember to order the files numerically according to the number in the top right of each form.
Where do you mail it to?

This can also be found at​ https://www.irs.gov/pub/irs-pdf/i1040gi.pdf p. 107.

When do you need to file?
June 15th! The government gives foreigners living abroad an extra two months to file their tax return. Your tax return mail must be postmarked by June 15th.
 
Step 6: Correct Mistakes With Form 1040X:

If after sending your form 1040 filing, and you realize you forgot to file something or there was a mistake, you will need to send in return 1040X. Otherwise you can skip this step.

Click here for From 1040X instructions and here for the From 1040X itself. Be sure print it out and read the instructions carefully. Remember that you don't have to send a copy of your old return, but you may be required to later. Also you should redo all the above forms and send them in together in the right order.

Where do you send your 1040x and revised documents? 

​Okay, you’re done! That was a pain, but it was free! You saved yourself $50 bucks by not buying the professional edition of some tax software, so go out and buy yourself a nice buffet dinner.

Still Have Questions?

• ​Call the IRS (+1 800-829-1040)
• Visit the IRS website
• Read the Form instructions again
• Google is your friend
• Consider paying for tax software
• Consider hiring a professional to file your taxes

Need help filing Taiwan taxes?

• See our Taiwan income tax filing guide here, and e-filing guide here.

Choosing to use the Foreign Tax Credit and Additional Child Tax Credit instead of the Foreign Income Exclusion

In some cases, it may be more advantageous to use the foreign tax credit and additional child tax credit if you have children. This way, your foreign taxes may be cancelled out and you can receive payment for having a child. However if you choose this route, you cannot use the foreign income tax exclusion, and if you chose the foreign income tax exclusion the previous year and choose the foreign tax credit this year, then you will not be able to use the foreign income tax exclusion for another five years.

Foreign Tax Credit

The foreign tax credit is basically a deduction of your foreign taxes in related to your US taxes. As long as your foreign taxes are more than your US taxes in relation to your income, you will end up paying no US tax.

Follows the instructions and make the calculation. You will probably have to write in "wages" for item 1a.
Also use the latest foreign exchange rates from the IRS for the currency you paid taxes.

Schedule 3

You will then need to fill in schedule 3 and add foreign tax credit, so that you can include it on form 1040.

Schedule 8812 Additional Child Tax Credit

After your foreign taxes have been cancelled out, you may be able to receive an additional tax refund if you have children. If you have multiple children, the money adds up. You can receive up to 1400 USD in cash per child, or deduct up to 2000 USD of taxes per child. 

You can then deduct an amount from taxes for receive a refund. Therefore if you have children it would be more advantageous to go this route. However, if your child is born overseas they need a valid Social Security Number for the filing year. 

​Closing Thoughts:
​
America's worldwide tax system is a joke. FACTA is too. It's an invasion of privacy and inhibits Americans from doing business worldwide. Just because I live overseas, I have to jump through a ton of hoops and file 4 separate forms just to prove that I owe $0 on my tax return. Getting rid of the healthcare mandate is a step forward, but FACTA and worldwide tax also need to be abolished. I fear that American Expats don't have a voice in congress on this issue, weather it be because we are few in number or because we are too focused on the politics and tax system of the country we actually live in. This subject deserves a blog of its own, so I will just stop here for now. 

Please like, comment, and share! If you have any advice or think we missed anything in the above guide, please let us know.

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