Americans Abroad: The Skinny on Paying Taxes
You may be living abroad, but you're still under Uncle Sam's thumb. Get the lowdown on what you should be paying in taxes.
You can run, but you can't hide. Even if your home is near the rainforests of Costa Rica, it isn't secluded enough to protect you from your U.S. tax burden.
If you're a U.S. citizen or resident alien who lives and works abroad, you must pay U.S. taxes. The rules that apply to you are slightly different, but no less complicated, than the tax rules applicable to those who live on U.S. soil. Your first point of reference should be IRS Publication 54-Tax Guide for U.S. Citizens and Resident Aliens Abroad. Just in case you need a little primer before you dive into this salient material, here's a summary of the key points.
Forms and filings
Your federal return is filed on a 1040 or 1040EZ, and you'll also have to complete Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. All currency values you provide to the IRS must be reported in U.S. dollars. That means that you must translate your income and reported expenses into dollars, using the exchange rate in force at the time that you received the income or paid out the expenses.
If you expect to owe at least $1,000 in taxes for the year, you may be required to make quarterly estimated tax payments, also; these are submitted with Form 1040-ES.
Foreign earned income and housing exclusions
Some U.S. citizens and resident aliens can exclude a portion of their income from tax liability with the Foreign Earned Income Exclusion. The exclusion amount for the 2008 tax year is $87,600. To qualify, you have to be a bona fide resident of another country. The easiest way to prove this is by living in that country for a total of 330 days out of 12 consecutive months.
You may also qualify for a tax exclusion or deduction related to your housing costs. This is applicable if you pay for your housing expenses with monies earned from an employer; if you pay these expenses with self-employment income, you'd use the housing deduction instead.
Housing expenses include rent, utilities, nondeductible occupancy tax, parking fees, repair costs, and furniture rentals. Expenses associated with buying property, such as mortgage payments, aren't included in the calculation of deductible or excluded housing costs.
Other things to know
Your U.S. tax return is due April 15 of each year, and covers the previous calendar year. You can mail the tax return, but you might find it easier to use the IRS e-file system. If you do choose to mail it, IRS Publication 54 lists the address to use.
One last thing: There are no excuses for not filing. In other words, you can't tell the IRS that you didn't file a return because you don't have Internet access in the rainforest.