When paying income taxes, individuals often assume they are only required to pay taxes to the country where they are living. However, under U.S. law, U.S. citizens and U.S. residents must file U.S. tax returns and report their worldwide income regardless of where they live. Oftentimes, once someone leaves the United States, he or she stops filing U.S. tax returns. Others who are born in the United States but moved overseas at a young age do not realize they need to file a U.S. tax return because of their U.S. citizenship.
When these individuals become aware that they have a U.S. tax filing requirement, they are often concerned about paying tax to two countries. However, the United States has tax treaties with many countries to avoid double taxation. The United States also provides exclusions and credits to help reduce the tax burden.
Besides the requirement to file a U.S. income tax return, individuals living abroad are also required to file a FinCen 114 (also known as a Foreign Bank Account Report, or FBAR) and Form 8938 (Statement of Foreign Financial Assets) if they meet certain criteria. FinCen 114 must be filed if an individual has a financial account in a foreign country or has a financial interest in or signature authority over a foreign account, when the aggregate highest balances of all foreign accounts exceeds $10,000 USD at any time during the calendar year.
The requirement to file a Form 8938 depends on the amount of “specified foreign financial assets,” which includes other assets in addition to what is reportable on the FBAR. The Form 8938 reporting thresholds differ depending on whether an individual lives in the United States or abroad. If an individual lives abroad and is filing as an unmarried individual or as married filing separately, the requirement to file Form 8938 is if the total value of the specified foreign financial assets is more than $200,000 USD on the last day of the tax year, or more than $300,000 USD at any time during the year.
If an individual is living abroad and is filing married filing jointly, the requirement to file Form 8938 is if the total value of foreign financial assets is more than $400,000 USD on the last day of the tax year, or more than $600,000 USD at any time during the year. For individuals living in the United States, the thresholds are lower. More information regarding FinCen 114 and Form 8938 can be found on our previous blog post here.
There may be other U.S. forms and returns that need to be filed depending on the individual’s business activities and financial investments. If you are a U.S. citizen living abroad and want more information regarding your U.S. tax return filing requirements, please contact us.
By Kimberly Miller