FAQ

Comprehensive US Expat CPA FAQ

Comprehensive US Expat CPA FAQ

General US Tax Obligations

Q: Do US citizens living abroad still need to file US tax returns?
A: Yes, US citizens and green card holders must file US tax returns regardless of where they live. The US taxes based on citizenship, not residence. You must report worldwide income, even if you pay taxes in your country of residence.
Q: What is the filing deadline for US expats?
A: US expats automatically receive a 2-month extension (to June 15) without filing any forms. However, any taxes owed are still due by April 15 to avoid interest charges. You can request an additional extension to October 15 using Form 4868.
Q: What forms do most expats need to file?
A: Common forms include:
  • Form 1040 (standard tax return)
  • Form 2555 (Foreign Earned Income Exclusion)
  • Form 1116 (Foreign Tax Credit)
  • Form 8938 (Statement of Foreign Financial Assets)
  • FinCEN Form 114 (FBAR)
  • Form 8621 (for PFIC investments)
  • Schedule B (for foreign accounts)
Q: Do I need to file if my income is below the filing threshold?
A: Yes, if you have self-employment income over $400 or want to claim refundable credits. Even if not required, filing can be beneficial to start the statute of limitations and maintain compliance.
Q: What exchange rate should I use for currency conversion?
A: Use the IRS yearly average exchange rate for general income/expenses, or the spot rate on specific transaction dates. The IRS publishes official rates, but other reputable sources (like OANDA or XE) are acceptable if consistently applied. greenbacktaxservices.com

Foreign Earned Income Exclusion (FEIE)

Q: What is the Foreign Earned Income Exclusion for 2024/2025?
A: For 2024, the FEIE is $126,500. For 2025, it’s $130,000. This amount is adjusted annually for inflation. irs.gov
Q: What qualifies as “earned income” for FEIE?
A: Earned income includes wages, salaries, professional fees, and self-employment income. It excludes passive income like dividends, interest, capital gains, pensions, and social security.
Q: What are the two tests to qualify for FEIE?
A:
  • Bona Fide Residence Test: Establish residence in a foreign country for an uninterrupted full tax year
  • Physical Presence Test: Be physically present in foreign countries for 330 full days in any 12-month period
Q: Can I switch between the Physical Presence and Bona Fide Residence tests?
A: Yes, you can use whichever test you qualify for each year. Many expats use Physical Presence initially, then switch to Bona Fide Residence once established abroad.
Q: How do I count days for the Physical Presence Test?
A: Count only full 24-hour days in foreign countries. Travel days to/from the US typically don’t count. Days in international waters or airspace don’t count. Keep detailed travel records.
Q: What is Foreign Housing Exclusion/Deduction?
A: You can exclude/deduct qualified housing expenses above a base amount (16% of FEIE). The maximum varies by location, with high-cost cities having higher limits.
Q: Can I claim FEIE if I work remotely for a US company?
A: Yes, if you meet the qualification tests. The income source (US or foreign employer) doesn’t matter—what matters is where you perform the work.
Q: Does FEIE exempt me from self-employment tax?
A: No, FEIE only excludes income from income tax. Self-employed expats still owe self-employment tax (15.3%) unless covered by a totalization agreement.

Foreign Tax Credits

Q: When should I use Foreign Tax Credit instead of FEIE?
A: Consider FTC when:
  • You live in a high-tax country
  • You have significant passive income
  • You want to contribute to IRAs
  • You need to show US taxable income
  • You want to preserve US tax attributes
Q: Can I use both FEIE and Foreign Tax Credit?
A: Yes, but not on the same income. Typically, use FEIE first on earned income, then FTC on remaining income and passive income.
Q: How do I calculate Foreign Tax Credit?
A: FTC is limited to the lesser of foreign taxes paid or US tax on foreign income. Calculate separately for different income categories (general, passive, etc.).
Q: What foreign taxes qualify for FTC?
A: Income taxes paid to foreign governments qualify. VAT, property taxes, and social insurance contributions generally don’t qualify (unless they’re essentially income taxes).
Q: Can I carry forward unused Foreign Tax Credits?
A: Yes, unused FTCs can be carried back one year and forward ten years.
Q: How do I handle foreign tax on income not recognized by the US?
A: Timing differences create complexity. You may need to track basis differences and adjust credits when income is recognized for US purposes.

FBAR and Form 8938

Q: What’s the difference between FBAR and Form 8938?
A:
  • FBAR: Reports foreign financial accounts to FinCEN when aggregate value exceeds $10,000 any time during the year
  • Form 8938: Reports specified foreign financial assets to IRS when meeting higher thresholds ($200,000 for singles abroad)
Q: What accounts must be reported on FBAR?
A: Bank accounts, investment accounts, pension accounts (even if tax-deferred), accounts where you have signature authority, and certain insurance policies with cash value.
Q: Do I report accounts I don’t own but can access?
A: Yes, if you have signature authority, financial interest, or other authority over the account, even if not the owner.
Q: What are the Form 8938 filing thresholds for expats?
A: Living abroad:
  • Single: $200,000 on last day of tax year or $300,000 any time during year
  • Married Filing Jointly: $400,000 on last day or $600,000 any time during year
Q: What assets go on Form 8938 but not FBAR?
A: Foreign real estate held directly, foreign partnership interests, foreign stock/securities held directly, and other non-account assets.
Q: Are retirement accounts reportable?
A: Yes, most foreign pensions and retirement accounts must be reported on both FBAR and Form 8938, regardless of tax-deferred status in the foreign country.
Q: What are the penalties for non-compliance?
A:
  • FBAR: Up to $16,248 per account for non-willful violations (adjusted for inflation annually); up to greater of $162,489 or 50% of account balance for willful violations (adjusted for inflation annually) greenbacktaxservices.com
  • Form 8938: $10,000 initial penalty, up to $60,000 for continued failure irs.gov

State Tax Issues

Q: Do I still owe state taxes as an expat?
A: It depends on your state ties. Some states aggressively pursue former residents, while others release tax obligations more easily.
Q: Which states are hardest to escape for tax purposes?
A: California, New York, Virginia, New Mexico, and South Carolina have strict residency rules. California is particularly aggressive about maintaining tax claims.
Q: Which states have no income tax?
A: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. investopedia.com
Q: How do I break state tax residency?
A: Steps include:
  • Change driver’s license and voter registration
  • Close local bank accounts
  • Sell or rent out property
  • Establish new domicile
  • File final part-year resident return
  • Document your departure
Q: Can I establish residency in a no-tax state before leaving?
A: Yes, this is a common strategy. Establish genuine ties to states like Florida or Texas before expatriating to avoid ongoing state tax obligations.
Q: What if my state doesn’t recognize FEIE?
A: Some states don’t conform to federal FEIE rules. You may owe state tax even on excluded federal income. Research your specific state’s treatment.

Business and Self-Employment

Q: How are foreign corporations with US owners taxed?
A: Controlled Foreign Corporations (CFCs) face complex rules including:
  • GILTI (Global Intangible Low-Taxed Income)
  • Subpart F income
  • Transition tax
  • Form 5471 reporting requirements
Q: What is GILTI and how does it affect me?
A: GILTI taxes US shareholders on foreign corporation earnings above a 10% return on tangible assets. Individual shareholders face harsh treatment without proper planning.
Q: Should I operate as a sole proprietor or form a foreign company?
A: Consider:
  • Sole proprietor: Simpler, eligible for FEIE, but exposed to self-employment tax
  • Foreign company: Complex compliance, potential GILTI issues, but possible local benefits
Q: What are my self-employment tax obligations?
A: Self-employed expats owe 15.3% SE tax unless covered by a totalization agreement. FEIE doesn’t reduce SE tax.
Q: Which countries have totalization agreements with the US?
A: 30 countries including most of Europe, Australia, Canada, Japan, and South Korea. These agreements prevent double social security taxation. en.wikipedia.org
Q: How do I report foreign partnership income?
A: File Form 8865 for foreign partnerships. Income flows through to your personal return. Complex rules apply for contributions and distributions.
Q: What about operating a US LLC from abroad?
A: Single-member LLCs remain transparent for US tax. Consider foreign tax treatment—some countries view LLCs as corporations, creating potential double taxation.

Investment and Retirement

Q: What is a PFIC and why should I care?
A: Passive Foreign Investment Companies include most foreign mutual funds and ETFs. They face punitive taxation including:
  • Highest ordinary income rates
  • Interest charges on deferred gains
  • Complex Form 8621 reporting
Q: How can I invest without PFIC problems?
A: Options include:
  • US-based ETFs and mutual funds
  • Individual foreign stocks
  • US brokerage accounts that accept expat clients
  • Real estate
  • Alternative investments
Q: Can I contribute to an IRA while using FEIE?
A: No, FEIE reduces taxable earned income to zero, eliminating IRA contribution eligibility. Consider using Foreign Tax Credit instead.
Q: How are foreign pensions taxed?
A: Complex area depending on:
  • Tax treaty provisions
  • Type of pension
  • Employer vs. employee contributions
  • Whether it’s similar to US qualified plans
Q: Should I participate in my foreign employer’s retirement plan?
A: Consider:
  • Tax treaty benefits
  • Employer match value
  • US tax treatment
  • Reporting requirements
  • Future access to funds
Q: What about foreign social security?
A: Benefits may be taxable in US. Totalization agreements affect eligibility and prevent double taxation. Some treaties provide exclusive taxing rights to country of residence.
Q: Can I maintain my US 401(k) while living abroad?
A: Yes, but:
  • May face foreign tax on distributions
  • Limited investment options
  • Consider treaty benefits for pension distributions
  • Some countries tax unrealized gains

Real Estate

Q: How is foreign rental income taxed?
A: Report on Schedule E. You can deduct expenses including depreciation, but must convert all amounts to USD. Consider foreign tax credit for local taxes paid.
Q: What about selling foreign real estate?
A: Report capital gains on Schedule D. Calculate gain in USD using historical exchange rates. Primary residence exclusion ($250K/$500K) available if requirements met.
Q: How do I calculate depreciation on foreign property?
A: Use US depreciation rules (27.5 years for residential). Convert cost basis to USD using exchange rate at purchase. Track in USD throughout ownership.
Q: Do I get the primary residence exclusion on foreign homes?
A: Yes, if you meet the 2-out-of-5-year ownership and use tests. The exclusion applies to foreign and US properties equally.
Q: What if I rent my foreign home on Airbnb?
A: Rental income is taxable. If rented less than 15 days per year, income may be excludable. Otherwise, allocate expenses between personal and rental use.
Q: How are foreign real estate taxes handled?
A: Property taxes are itemized deductions subject to SALT limits. They don’t qualify for foreign tax credit but may be deductible against rental income.

Family and Dependents

Q: Can I claim Child Tax Credit while living abroad?
A: Yes, the refundable portion (Additional Child Tax Credit) is available to expats. Worth up to $1,700 per child for 2024. greenbacktaxservices.com
Q: How do I report my foreign spouse’s income?
A: Options include:
  • Married Filing Separately (limits many benefits)
  • Married Filing Jointly with foreign spouse (requires ITIN/SSN and reporting worldwide income)
  • Head of Household if qualifying
Q: Should my foreign spouse get an ITIN?
A: Consider if:
  • You want to file jointly
  • Spouse has US income
  • Need to claim treaty benefits
  • Want to build US credit history
Q: What about education credits for foreign schools?
A: Foreign universities may qualify for American Opportunity and Lifetime Learning Credits if they participate in US federal student aid programs.
Q: How do I handle child support and alimony internationally?
A: Alimony paid under pre-2019 agreements is deductible/taxable. Child support is neither. Currency fluctuations and foreign enforcement add complexity.
Q: Can my foreign-born child get a US Social Security number?
A: Yes, if the child is a US citizen. Report birth to US consulate and apply for Consular Report of Birth Abroad and SSN.

Compliance and Penalties

Q: What is Streamlined Foreign Offshore Procedure?
A: Program for non-willful compliance failures. File 3 years of returns and 6 years of FBARs with explanation. No penalties if accepted.
Q: When should I consider voluntary disclosure?
A: If non-compliance was willful or criminal, consider formal Voluntary Disclosure Program. Limits criminal prosecution risk but includes penalties.
Q: What triggers an audit for expats?
A: Common triggers:
  • Late or missing information
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