a reply to: SerenTheUniverse
Good topic. I had read about this years ago and thought; well that is one way to keep us citizens enslaved.
Here is an article explaining how the overseas tax works for US citizens; it is freaking nutcakes:
"You're a US citizen or a green card holder and you live somewhere outside the USA (i.e. in a "foreign" country).
You may have US tax filing obligations if you have personal income such as wages, salary, commissions, tips, consultancy fees, pension fund, alimony,
US and/or foreign social security, interest, dividends, capital gains, rental property, farm income, royalties, inheritance or payment in kind in the
US or abroad.
You may have US tax filing obligations even if you haven't ever lived in the USA or left several years ago and all your income is from "foreign"
You may have US tax filing obligations even if some or all of your income was already taxed at source or is going to be taxed by a foreign country.
You may have US tax filing obligations even if you aren't earning any money but are married to someone who did have income.
Basically, you have to file IRS Form 1040 and relevant schedules for the previous year if your income was above a certain threshold. These thresholds
are the same as for US residents. For tax year 2018 (filing in 2019) the thresholds (total yearly income) are:
Under 65 65 or older
You are single (unmarried) $12,000 $13,600
You are married filing jointly $24,000 $26,600 (both over 65)
You are married filing separately $5 $5
You are filing as "Head of household" $18,000 $19,600
You are a widow or widower $24,000 $25,300
Filing the 1040 is generally due each year on April 15th (Monday April 15th in 2019), with an automatic extension to June 15th for Americans resident
abroad, but if any taxes are due, interest is calculated starting April 15th up to payment date.
HOW DOES LIVING ABROAD MITIGATE YOUR US TAX?
There are basically two methods by which you can reduce your US tax by a substantial amount. These are the "Foreign Earned Income Exclusion (FEIE)"
and the "Foreign Tax Credit." However, neither of these methods excuses you from filing if your income was above the filing threshold.
The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) allows you to exclude a certain amount of your FOREIGN EARNED income from US tax. For
tax year 2018 (filing in 2019) the exclusion amount is $103,900. What this means is that if, for example, you earned $118,000 in 2018, you can
subtract $103,900 from that leaving $14,100 as taxable by the US. But beware: this $14,100 is taxable at tax rates applying to $118,000 (the so-called
"stacking rule"). The exclusion applies only to foreign earned income. Other income, such as pensions, interest, dividends, capital gains, US-sourced
income, etc., cannot be excluded with the FEIE. You are liable for full US tax on this type of income.
Here's a simple example. Suppose you live in France and you earned EURO 100,000 (about $118,000) from your French employer. You are married filing
jointly, have two children and you take the standard deduction ($24,000) and child tax credit ($4,000 for two children).
The US tax on this income is calculated as follows:
US tax on $118,000 = $8,559
Subtract US tax on $103,900 (the exclusion) = $5,457
Net US tax payable: $3,102
While this is only an approximate calculation, it gives you an idea of how the system works.
The other method for reducing your US tax bill is the foreign tax credit, using IRS Form 1116. If your income was taxed by a foreign country, you can
subtract that tax from your US tax, in most cases substantially reducing your US tax bill. But be careful: you cannot claim a foreign tax credit for
foreign taxes on income excluded on Form 2555. In other words, you can only claim a foreign tax credit for foreign taxes on the same income that the
US is taxing. The fraction of your foreign taxes that can be taken as a tax credit is determined by the ratio of excluded income to total income.
Here's an example, using the same figures as above.
French taxes on EURO 100,000 ($118,000) are EURO 12,302 = $14,516
Fraction for excluded income ($103,900/$118,000) = 0.881
Fraction of foreign taxes that can be taken as credit = 0.119
Net French tax that can be taken as credit (0.119 x $14,516) = $1,727
This French tax can be subtracted from your US tax ($3,102) leaving $1,375 which should be paid to the IRS.
In this particular example, you would actually be better off by just using the foreign tax credit alone and not even claiming the FEIE. If you do this
you wouldn't have to pay anything in US taxes (French tax $14,516 is greater than US tax $8,559). In addition, the foreign tax credit can be applied
(in some cases) against tax on unearned income as well.
So you see that by judiciously combining the FEIE with the foreign tax credit or by applying only the foreign tax credit you can substantially reduce
or even get your US tax bill down to zero. Again, this is only an approximate calculation to serve as an example of how the system works. Reminder:
you MUST file your US tax forms even if your calculated tax bill is zero when applying the FEIE and/or the foreign tax credit.
To summarize: If your foreign earned income was less than $103,900 use the FEIE to reduce your US tax on this income to zero. However, if your foreign
income was more than $103,900 explore the possibility of using your foreign taxes as credit against any US tax which may be due.
Be aware that if you have been claiming the FEIE in previous years using Form 2555 and you decide this year to use only the foreign tax credit you
cannot go back to the FEIE for the next six years unless you receive permission from the IRS.
In some cases, you can exclude qualified housing expenses from your taxable income. This exclusion can be calculated using Part VI on Form 2555.
There are many other aspects to be considered when figuring your US taxes. Among these are the "Alternative Minimum Tax" (AMT), handling of unearned
(passive) income such as interest and capital gains; the foreign housing exclusion if you rent your lodging; earnings of a non-US spouse; business
expenses; the possibility of itemizing deductions instead of applying the standard deduction; state taxes in certain US states where you formerly
resided; etc., etc., but they go beyond the simple explanation that this article is intended to be. Self-employment taxes (for Social Security and
Medicare) can apply if your net annual earnings exceed $400 and you live in a country which doesn't have a social security "totalization" agreement
with the US. If you need to consider any of these elements, you would be well advised to consult an international tax expert, a list of which is