Living Overseas? What Expats Need To Know About IRS Back Taxes

Andrea Miller

Expert Contributor
Last Updated: December 9, 2021

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Americans who live and work overseas must follow the IRS rules for international income to avoid fees and penalties.
Certain foreign tax credits can prevent you from being taxed twice on your income (once by the country where you live and once by the U.S.).
You may want to consult a tax professional who specializes in working with expatriates.

According to data reported in the Washington Post, about 8.7 million Americans currently live overseas. If you’re already among their numbers or you’re considering becoming an expatriate, you will have tax considerations when you move to another country. This is especially true if you plan to work while you’re there. If you have back taxes with the IRS, your situation becomes even more complex. Expats and future expats who have back taxes should heed this information to avoid steep fees and penalties. 

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1 Rules for International Income

2 Tax Credits for Expats

3 Foreign Tax Credit

4 The Foreign Earned Income Exclusion (FEIE)

5 The Foreign Housing Exclusion

6 Child Tax Credit

7 Foreign Bank Account Reporting

8 Dealing With Back Taxes When You Live Overseas

Rules for International Income

You must file an income tax return if you earned money during the tax year through wages, dividends, interest, rental income, and/or all other U.S. and non-U.S. sources. Self-employed individuals must file when they earn more than $400 in the tax year. 

If you’re not living in the U.S. on the tax deadline (usually on or around April 15), you get an automatic two-month filing extension. After the June filing date, however, you’ll be subject to penalties and interest if you didn’t file or pay your taxes on time.

If you retire abroad, you can still receive U.S. Social Security payments for which you are eligible. In general, these payments are not taxable unless you have other income. 

Tax Credits for Expats

When you earn foreign income, you may be eligible for certain tax credits. You must file your tax return to claim these credits, and you must qualify as an official expat. 

Living Overseas? What Expats Need To Know About IRS Back Taxes

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Foreign Tax Credit

The Foreign Tax Credit allows you to deduct foreign income from your U.S. tax return on a dollar-for-dollar basis using the latest approved exchange rates. The income in question must be individual income tax from a foreign source accrued during the current tax year. You cannot receive a refund as a result of the deduction amount. However, any surplus that occurs — if your foreign income exceeds your U.S. tax liability — can be used as a credit for the immediate prior tax year or carried forward as a credit for up to 10 years. 

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The income cannot be earned from certain countries designated as supportive of international terrorism by the Department of State, including North Korea, Iraq, and Cuba. Certain other types of income are also tax-exempt, so check with a tax professional who has experience working with expats. To claim this credit, file Form 1116 with your tax return.

The Foreign Earned Income Exclusion (FEIE)

This credit is designed to prevent expats from being taxed both in a foreign country and in the U.S. You can exclude up to $102,100 in foreign income from your U.S. tax return as of 2017 (numbers are adjusted for inflation each year). To qualify, you must pass one of two residency tests:

The physical presence test requires that you either have foreign earned income, excluding capital gains, pensions, interest, and dividends; you have a tax home in the foreign country, defined as a job lasting at least 12 months; and have resided in the country for at least 330 of the last 365 days. You cannot pass this test if you have retained a U.S. address. You must plan your travel time carefully to ensure you are in the foreign country for 330 full days. Missing the cutoff by just a day or two can result in substantial tax costs.
The bona fide residency test also requires you to have foreign earned income and a tax home. However, you must live in the foreign country for the entire tax year and have intention to remain there indefinitely.

The Foreign Housing Exclusion

This credit is used in conjunction with the FEIE credit. It lowers your taxable income by deducting the cost of living in the foreign country, which is often higher than a comparable living situation in the U.S. 

To qualify for the Foreign Housing Exclusion, you must qualify for the FEIE. Costs that can be deducted under this exclusion include rent, utilities (excluding cable, phone, and internet), leasing fees, homeowner’s or renter’s insurance, parking costs, furniture rental, and required repairs. You cannot deduct the costs of purchased furniture, mortgage payments, and domestic services such as housecleaning. 

Deductible costs must be paid by your employer as part of your gross compensation. The amount of the deduction starts at 16% of your FEIE and has a cap depending on your location. File Form 2555 with your tax return to claim this credit.

Child Tax Credit

If you and your children are living overseas, you are still eligible for the child tax credit as long as each child you are claiming has a U.S. Social Security number. 

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Foreign Bank Account Reporting

If you have more than $100,000 held in foreign bank accounts, you must file the Foreign Bank Account Report (FBAR). This rule prevents U.S. citizens from avoiding taxes by hiding money abroad. The report is filed separately from your tax return using FinCEN Form 114. Another form to be filed with your tax return, Foreign Account Tax Compliance Act Form 8938, may be required if you have assets exceeding the threshold established by your filing status.

Dealing With Back Taxes When You Live Overseas

If you are an expat and have not filed U.S. tax returns as required, or you have filed but can’t afford to pay your balance, don’t panic. You may be able to take advantage of Streamlined Offshore Filing Procedures, which allow you to file the past three years of tax returns without penalty. You can also file the last six years of FBAR under this provision. 

Some individuals renounce U.S. citizenship to avoid paying taxes. If you go this route, you will have to prove that you have filed and paid all outstanding taxes for the past five years.

If you owe taxes you can’t pay, consult a CPA who has experience working with expats. A CPA can help you amend your returns to claim the credits above. You can also contact Solvable to be matched with well-reviewed companies that provide solutions for those facing tax, student loan, and credit card debt.

Andrea Miller

Expert Contributor
Last Updated: December 9, 2021

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