Comprehensive US Expat CPA FAQ

US Expat CPA FAQ 🌍

Navigating US taxes while living abroad can be complex. This guide answers the most common questions US expatriates face, providing clarity on everything from filing obligations to investment strategies.

General US Tax Obligations for Expats

Q: Do US citizens living abroad still need to file US tax returns?
A: Yes, absolutely. The United States has a citizenship-based taxation system. This means all US citizens and Green Card holders must file a US federal tax return every year, reporting their worldwide income, regardless of where they live. This obligation continues until you formally renounce your citizenship or surrender your green card.
Q: What is the filing deadline for US expats?
A: US expats get an automatic two-month extension to June 15 to file their tax return. ⚠️ Important: This is an extension to *file*, not to *pay*. Any taxes owed are still due by the original April 15 deadline to avoid interest charges. You can request a further extension to October 15 by filing Form 4868.
Q: What income is taxable for US expats?
A: All worldwide income is potentially taxable, even if it's tax-free in your country of residence. This includes:
  • Wages, salaries, and self-employment income
  • Investment income (dividends, interest, capital gains)
  • Rental income from foreign properties
  • Foreign pension and social security benefits
  • Cryptocurrency transactions
  • Foreign unemployment benefits and gambling winnings
Q: Do I need to file if my income is below the filing threshold?
A: Even if your gross income is below the standard filing threshold, you must file if you have self-employment income over $400. It's often wise to file anyway to start the statute of limitations, claim refundable credits (like the Additional Child Tax Credit), or establish a continuous compliance history.
Q: What forms do most expats need to file?
A: While every situation is unique, a typical expat filing may include these forms:
  • Form 1040: The standard individual tax return.
  • Form 2555: To claim the Foreign Earned Income Exclusion (FEIE).
  • Form 1116: To claim the Foreign Tax Credit (FTC).
  • FinCEN Form 114 (FBAR): Report of Foreign Bank and Financial Accounts.
  • Form 8938: Statement of Specified Foreign Financial Assets.
  • Schedule B: To report interest, dividends, and foreign accounts.
  • Form 8621: For Passive Foreign Investment Company (PFIC) holdings.
  • Form 5471/8865: For interests in foreign corporations or partnerships.
  • Form 3520: For foreign trusts or receiving large foreign gifts.
Q: What exchange rate should I use for currency conversion?
A: You must express all amounts in US dollars. The IRS accepts two main methods:
  • Yearly Average Rate: For recurring income and expenses (e.g., salary, rent).
  • Spot Rate: For specific transactions on specific dates (e.g., sale of a property).
You can use official IRS rates or rates from reputable sources like OANDA or XE.com, but you must be consistent and keep records of the source you used. Source: IRS.gov

Foreign Earned Income Exclusion (FEIE)

Q: What is the Foreign Earned Income Exclusion for 2024 and 2025?
A: The FEIE allows you to exclude a certain amount of your foreign earned income from US income tax. For the 2024 tax year, the maximum exclusion is $126,500. The amount for 2025 is $130,000, as it is adjusted annually for inflation. Source: IRS.gov
Q: How do I qualify for the FEIE?
A: You must have foreign earned income, your tax home must be in a foreign country, and you must meet one of two tests:
  • Bona Fide Residence Test: You must be a resident of a foreign country for an uninterrupted period that includes an entire tax year (e.g., January 1 to December 31).
  • Physical Presence Test: You must be physically present in a foreign country or countries for at least 330 full days during any 12-month period.
Q: What happens if I revoke the FEIE?
A: If you choose to revoke your election to use the FEIE (for example, to switch to using the Foreign Tax Credit), you cannot claim the FEIE again for the next five tax years without obtaining special permission from the IRS. This is a significant decision that requires careful planning.
Q: Does the FEIE exempt me from Social Security and Medicare (FICA) taxes?
A: No. The FEIE only applies to US income tax. If you are self-employed abroad, you are still liable for US self-employment taxes (Social Security and Medicare) on your earnings, unless you live in a country that has a Totalization Agreement with the US.

Foreign Tax Credits (FTC)

Q: When should I use the Foreign Tax Credit (FTC) instead of the FEIE?
A: Using the FTC is often more beneficial if:
  • You live in a country with a higher income tax rate than the US.
  • You want to make contributions to a US IRA or 401(k).
  • You have children and want to maximize the refundable portion of the Child Tax Credit.
  • You have significant foreign passive income (interest, dividends, etc.) which the FEIE doesn't cover.
  • You have unused foreign tax credits from prior years that you can carry forward.
Q: Can I use both the FEIE and the FTC?
A: Yes, but not on the same income. You cannot claim a foreign tax credit for taxes paid on income that you have excluded using the FEIE. However, you can use the FEIE to exclude your earned income up to the limit and then use the FTC to offset US tax on any income *above* that limit or on passive income.
Q: What foreign taxes are eligible for the credit?
A: Generally, only income taxes (or taxes paid in lieu of income taxes) paid or accrued to a foreign government are creditable. Other taxes, such as value-added tax (VAT), sales tax, wealth tax, or property taxes, are not eligible for the credit.

FBAR and Form 8938

Q: What's the difference between the FBAR and Form 8938?
A: They are two separate reporting requirements.
Feature FBAR (FinCEN Form 114) Form 8938 (FATCA)
Who Reported to the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. Reported to the IRS as part of your tax return.
What Reports foreign financial accounts (bank, brokerage, mutual funds, pensions). Reports "specified foreign financial assets," which includes accounts but also things like foreign stock held directly, and foreign partnership interests.
Threshold When the aggregate value of all foreign accounts exceeds $10,000 at any point during the year. Much higher thresholds that vary by filing status (e.g., for expats, starts at $200,000 on the last day of the year).
Q: Are my foreign pension or retirement accounts reportable?
A: Yes, in most cases. Foreign retirement and pension accounts are considered foreign financial accounts and must be reported on the FBAR and often on Form 8938 if the thresholds are met. This is true even if the plan is tax-deferred in your country of residence.
Q: What are the penalties for failing to file these forms? ⚖️
A: The penalties can be severe.
  • FBAR: Non-willful violations can result in a penalty of up to $16,536 per account, per year (adjusted for inflation). Willful violations can lead to penalties of the greater of $165,353 or 50% of the account balance, plus potential criminal charges. Source: FinCEN
  • Form 8938: A failure-to-file penalty of $10,000, which can increase by an additional $10,000 for each 30-day period of non-filing after an IRS notice, up to a maximum of $60,000. Source: IRS.gov

State Tax Issues

Q: Do I still have to file state taxes while living abroad?
A: It depends. Unlike the federal government, states base taxation on residency and domicile. If you were a resident of a state before moving abroad, you may continue to be considered a resident for tax purposes until you take specific steps to sever your ties and establish a new domicile elsewhere.
Q: How do I properly sever ties with my former state to stop filing?
A: You need to demonstrate your intent to permanently leave the state. Key actions include:
  • Selling your primary residence in the state (or renting it out on a long-term lease).
  • Obtaining a driver's license in your new foreign country.
  • Closing bank accounts in your former state.
  • Registering to vote in your new country (if applicable) or as an overseas voter.
  • Moving your cherished possessions and family abroad.
  • Filing a final part-year resident tax return.
Q: Which states are known for being aggressive in pursuing taxes from former residents?
A: Some states, often called "sticky states," have very strict residency rules and are known for being particularly difficult to break tax residency from. These include California, New York, Virginia, and New Mexico.

Business and Self-Employment

Q: I own a foreign corporation. What are my US reporting obligations?
A: Owning a foreign corporation as a US person is extremely complex. You will likely need to file Form 5471, an informational return that is notoriously complicated and carries a $10,000 penalty for late or inaccurate filing. You may also be subject to complex anti-deferral tax regimes like Subpart F income and GILTI (Global Intangible Low-Taxed Income). Professional advice is essential here.
Q: What is a Totalization Agreement?
A: A Totalization Agreement is a bilateral treaty between the US and another country to prevent double taxation of social security taxes and to coordinate benefits. If you live and work in one of the 30 countries with an agreement (e.g., UK, Germany, Canada, Australia), you generally only pay social security taxes to one country. This can save you from paying the 15.3% US self-employment tax. Source: Social Security Administration
Q: I work remotely as a freelancer. How am I taxed?
A: As a self-employed individual, you report your income and expenses on Schedule C. Your net profit is considered earned income, which is eligible for the FEIE or FTC. However, you will still be subject to US self-employment tax unless you are covered by a Totalization Agreement. It's critical to keep meticulous records of your income and business expenses.

Investment and Retirement

Q: What is a PFIC and why are they a problem for expats?
A: PFIC stands for Passive Foreign Investment Company. This category includes most non-US based mutual funds, ETFs, and some foreign pension plans. The US tax rules for PFICs are extremely harsh and complex, designed to discourage such investments. Gains are often taxed at the highest ordinary income rates plus an interest charge, regardless of how long you held the investment. Avoiding PFICs is a cornerstone of smart financial planning for US expats.
Q: How can I invest safely as an expat without running into PFIC issues?
A: The simplest way is to continue investing through a US-based brokerage account in US-domiciled stocks, bonds, and ETFs. This completely avoids the PFIC issue. Other options include investing directly in individual foreign stocks (not funds) or investing in real estate.
Q: Can I contribute to a US IRA or Roth IRA while living abroad?
A: You can only contribute to an IRA if you have taxable compensation. If you use the FEIE to exclude all of your foreign earned income, your taxable compensation becomes zero, and you cannot contribute to an IRA. However, if you use the Foreign Tax Credit (FTC) instead, you will have taxable income, which generally makes you eligible to contribute.
Q: What do I do if I receive a large gift or inheritance from a non-US person?
A: While you don't owe tax on the gift itself, you may have a reporting requirement. You must file Form 3520 if you receive more than $100,000 from a nonresident alien individual or foreign estate, or more than a certain threshold (around $19,570 for 2024) from a foreign corporation or partnership. The penalties for failing to file are significant.

Real Estate

Q: Do I qualify for the home sale exclusion ($250k/$500k) on a foreign property?
A: Yes. The primary residence exclusion is not limited to properties in the US. If you own and live in your foreign home for at least two of the five years before selling it, you can exclude up to $250,000 of the capital gain (or $500,000 if married filing jointly) from your US income.
Q: How do I calculate the capital gain on the sale of a foreign home?
A: This can be tricky due to currency fluctuations. You must calculate the basis (what you paid for it) in USD using the exchange rate on the date of purchase. You then calculate the sale price in USD using the exchange rate on the date of sale. The difference is your capital gain or loss in USD. This means you could have a capital gain in USD even if you have a loss in the local currency, or vice-versa.
Q: How is foreign rental income taxed in the US?
A: Foreign rental income is reported on Schedule E of Form 1040, just like US rental income. You report the gross rental income and can deduct related expenses like mortgage interest, property taxes, insurance, and depreciation. All figures must be converted to USD. You can then use the FTC to claim a credit for any income taxes paid on that rental income in the foreign country.

Family and Dependents

Q: Can I claim the Child Tax Credit while living abroad?
A: Yes. To claim the Child Tax Credit, your child must be a US citizen with a Social Security Number. While the full credit might be limited, expats can often claim the refundable portion, known as the Additional Child Tax Credit (ACTC). For 2024, this could be worth up to $1,700 per qualifying child.
Q: My spouse is not a US citizen. How does that affect my filing?
A: You have two main options:
  • Married Filing Separately (MFS): This is the default. You report only your own income. However, this filing status has higher tax rates and disqualifies you from many deductions and credits.
  • Married Filing Jointly (MFJ): You can elect to treat your non-citizen spouse as a US resident for tax purposes. This allows you to use the more favorable MFJ tax brackets and deductions, but it means you must report your spouse's entire worldwide income on your US tax return. This often requires your spouse to get an ITIN.
Q: Can my foreign-born child automatically become a US citizen?
A: Yes, if at least one parent is a US citizen who meets certain physical presence requirements in the US prior to the child's birth. To formalize this, you should file for a Consular Report of Birth Abroad (CRBA) at a US embassy or consulate. This document serves as official proof of US citizenship.

Compliance and Penalties

Q: I'm years behind on my US taxes. What should I do? 😨
A: Don't panic. The IRS has a program specifically for people in your situation called the Streamlined Foreign Offshore Procedures. It allows US taxpayers whose failure to file was non-willful to catch up on their obligations without facing penalties. You'll need to file the last 3 years of tax returns and the last 6 years of FBARs.
Q: What's the difference between "non-willful" and "willful" non-compliance?
A: This is a critical distinction based on your mindset.
  • Non-willful conduct is due to negligence, inadvertence, or a good faith misunderstanding of the law. For example, you genuinely didn't know you had to file. This is eligible for the penalty-free Streamlined Procedure.
  • Willful conduct involves a conscious, intentional violation of a known legal duty. This includes "willful blindness"—deliberately avoiding learning about your obligations. Willful cases face much harsher penalties and are not eligible for the Streamlined program.
Q: What triggers an IRS audit for an expat?
A: While audits are rare, certain factors can increase the risk:
  • High income.
  • Owning foreign corporations (Form 5471) or partnerships (Form 8865).
  • Inconsistencies between forms (e.g., reporting a foreign account on Form 8938 but not on the FBAR).
  • Claiming 100% business use of a vehicle or home office.
  • Large, unusual deductions or credits.

Special Situations

Q: How does renouncing US citizenship affect my taxes?
A: Renouncing citizenship is a serious step with significant tax consequences. If you are a "covered expatriate" (based on high net worth or tax compliance history), you may be subject to an Exit Tax. This tax is calculated as if you sold all your worldwide assets on the day before you expatriated. You must also file a final tax return and Form 8854.
Q: I'm a "digital nomad." How do my taxes work?
A: The digital nomad lifestyle creates unique challenges. It can be difficult to qualify for the FEIE's Bona Fide Residence or Physical Presence tests if you move frequently. You also need to establish a "tax home" to claim the FEIE, which can be problematic if you have no regular place of business. Careful planning and record-keeping are essential.
Q: What is the Foreign Account Tax Compliance Act (FATCA)?
A: FATCA is a US law that requires foreign financial institutions (banks, brokerages) to identify their US citizen clients and report information about their accounts directly to the IRS. This is why your foreign bank may have asked you for your US Social Security Number. It's the primary mechanism the IRS uses to track the foreign assets of US persons. Form 8938 is the individual's side of FATCA compliance.

Planning Strategies 💡

Q: What are the most common tax mistakes expats make?
A:
  1. Not Filing at All: Assuming that living abroad or paying local taxes absolves them of US filing duties.
  2. Investing in Foreign Mutual Funds (PFICs): Unknowingly creating a future tax nightmare.
  3. Ignoring State Taxes: Thinking that moving abroad automatically severs state tax residency without taking the proper steps.
  4. Missing FBAR/FATCA Filings: Overlooking these crucial informational reports and risking huge penalties.
  5. Choosing FEIE vs. FTC Poorly: Making a short-term choice without considering long-term goals like retirement savings or credits.
Q: How can I optimize my FEIE vs. FTC decision?
A: It's a strategic choice. Use the FEIE if you're in a low or no-tax country and want the simplest way to reduce your US tax bill. Use the FTC if you're in a high-tax country (as it can eliminate your US tax and generate credits for the future) or if you want to contribute to an IRA and maximize refundable credits. Run the numbers both ways before deciding.

Getting Professional Help

Q: When should I hire a professional who specializes in expat taxes?
A: While some with very simple situations might manage on their own, you should strongly consider hiring a professional if you:
  • Are behind on your filings.
  • Own a foreign business or are self-employed.
  • Have foreign investments or a foreign pension.
  • Are selling foreign real estate.
  • Have a non-US citizen spouse.
  • Find the rules overwhelming and want peace of mind.
Q: What should I look for in an expat tax specialist?
A: Look for a CPA (Certified Public Accountant) or EA (Enrolled Agent) who explicitly focuses on expatriate taxation. They should have deep experience with international tax treaties, Forms 5471, 8621, 3520, and the various compliance programs like the Streamlined Procedure. Ask about their experience with clients in your specific country of residence.

Recent Updates and Changes

Q: Are there any recent tax law changes that affect expats for the 2024/2025 tax season?
A: For the most part, major expat tax principles remain consistent. The main changes are annual inflation adjustments:
  • The Foreign Earned Income Exclusion, standard deduction, and tax brackets are all adjusted for inflation each year.
  • Penalty amounts for FBAR and other forms are also subject to inflation adjustments.
  • The refundable portion of the Child Tax Credit (ACTC) has increased.
Always consult a professional for the most current figures and rules applicable to your filing year.
Q: How has the Corporate Transparency Act (CTA) affected expats?
A: The CTA, effective January 1, 2024, requires many US entities, including LLCs commonly used by expats, to report information about their Beneficial Owners to FinCEN. If you own or control a US LLC or corporation, you may have a new reporting obligation for Beneficial Ownership Information (BOI), completely separate from your IRS tax filings.