How to pay your federal income tax while living abroad

This article was fact-checked by our editors and Jennifer Samuel, senior product specialist for Credit Karma.

Living overseas can be exciting, but if you’ve earned any income while living abroad, you’ll likely still have to file and pay federal income tax to the U.S.

Whether you’re living outside the country temporarily for work, are on a short-term sabbatical, are attending a college, or have decided to relocate permanently, you need to be aware of your possible tax obligations to Uncle Sam as long as you’re a citizen of the United States.

“The biggest thing U.S. expats need to remember is that they may still have filing requirements, even if they owe zero in U.S. tax each year,” says David McKeegan, cofounder of Greenback Expat Tax Services.

If you’re not sure of all the rules and regulations that apply to your income when you live outside the U.S., read on for some tax tips for Americans living abroad.

• Do you have to file?
• Foreign income taxes may be deductible
• Filing your tax return

Do you have to file?

If you’re a U.S. citizen living abroad, do you have to file a federal income tax form? The short answer is probably, but not always.

Generally, U.S. citizens or resident aliens living outside the states are subject to the same tax rules and filing requirements as your counterparts who live in the U.S. Any worldwide income you earn can be taxed by the U.S. federal government. And if your gross income, regardless of where you earned it, is at or above a certain threshold (for example, $10,400 for single filers and $20,800 for married filing jointly, for 2017 taxes), you’ll have to file a return.

If your gross income is less than the threshold, you may not be required to file an income tax return, but there may still be tax benefits to filing. Remember, the only way to claim any deductions or credits you may be eligible for is to file a return.

However, your tax situation will differ depending on specifics, like if you’re on military assignment, own a company in a foreign country and earn self-employment income, or are a student living abroad.

Military and U.S. government personnel

While members of the military on assignment abroad have the same tax-filing requirements and tax rates as those who reside in the U.S., they may be eligible for certain allowances and expenses that make their tax situation a bit more complicated. For example, U.S. Foreign Service employees might get a nontaxable allowance for representation expenses, or ordinary and necessary business expenses they incur to represent their country abroad.

Some cost-of-living allowances and travel allowances are tax-free, but any pay differentials or payments that civilian employees who work for the U.S. government receive while working abroad are usually taxable.

College students

Studying abroad can have several tax implications for college students and their parents.

First, studying outside the U.S. does not mean you automatically lose eligibility for certain education-related tax credits. If the foreign school you’re attending is eligible to participate in a student aid program run by the U.S. Department of Education, you may still be able to claim the American opportunity tax credit or the lifetime learning credit, and deduct student loan interest. Of course, you’ll have to meet income and other qualifications to claim these credits and deductions, so be sure to familiarize yourself with the specific requirements.

In order to claim any education credits or deductions you may qualify for, you need to file a tax return. College students who paid $600 or more in student loan interest during the year should receive Form 1098-T from their university, which details any amounts paid for tuition fees and any aid the student received. Use this form to help fill out your return.

Business owners

When it comes to overseas taxes, tax reform mainly affects expats who own a business outside the U.S., McKeegan says.

“These folks may be impacted by the Repatriation Tax on corporate profits (held overseas) of 15.5% and the GILTI (global intangible low-taxed income) tax on ongoing profits of controlled foreign corporations. If you are the owner of a foreign business, you should speak to a tax advisor,” he says.

Foreign income taxes may be deductible

Of course, the U.S. government isn’t the only one that may have an interest in the income of U.S. expats. Income earned in a foreign country may also be taxable in that country.

“Even if you are living abroad and paying taxes in your host country, you may still be required to file and pay taxes in the U.S., but there are some tools to help you avoid double taxation — such as the foreign earned income exclusion and the foreign tax credit,” McKeegan says.

Foreign earned income exclusion

The foreign earned income exclusion allows qualifying Americans to exclude up to $102,100 of income earned in a foreign country from their U.S. income tax. You also may be able to exclude or deduct certain foreign housing amounts and the value of meals and lodging that your employer provided. However, you can’t exclude pay you received for serving in the military or as a civilian employee of the U.S. government.

The IRS defines earned income as “pay for personal services performed, such as wages, salaries or professional fees.”

To qualify for the foreign earned income exclusion, your tax home must be in a foreign country and you must meet either the bona fide residence test or the physical presence test. It also doesn’t matter whether you earned the income from a foreign or U.S. employer.

If you are self-employed and earned income living abroad, you can claim the exclusion. This will reduce your regular income tax, but you’ll still be responsible for any self-employment tax.

Foreign tax credit

The IRS also offers the foreign tax credit to ease the burden of double taxation on Americans who live abroad.

If you paid foreign taxes on foreign earned income, and are also subject to U.S. taxes on that same income, you may be eligible to take an itemized deduction or a credit on your federal taxes. If you take the deduction, it’ll reduce your taxable income. However, if you take the credit, which the IRS points out is probably the option that’s “to your advantage” over the deduction, it’s a dollar-for-dollar reduction in your U.S. tax liability.

Just remember, that you cannot take both the foreign earned income exclusion and the foreign tax credit on the same income.

Filing your tax return

You may be able to e-file your return if you live abroad. If your adjusted gross income is within the income limits for the IRS Free File program, you can e-file your taxes through the program. You may also be able to use commercial tax-preparation software that can help you e-file when you’re outside the U.S. Plus you automatically get a two-month extension on the filing deadline. You may also be able to get an extension for paying any tax you owe, but you’ll still owe interest from the regular due date until you pay the full amount owed.

It’s also worth mentioning that if you have a financial interest in any foreign bank accounts that exceeded more than $10,000 anytime during the year, you might also be required to file a Report of Foreign Bank and Financial Accounts.

If you live in a foreign country and choose not to e-file, you can mail your return to the Department of U.S. Treasury.

Bottom line

Living abroad for work or for pleasure may seem like an extended vacation, but it doesn’t mean you get a respite from U.S. income taxes. Fortunately, the IRS does offer the foreign earned income tax exclusion and foreign tax credit to give Americans living abroad a way to avoid double taxation on income earned in a foreign country.

Being an American by birth or having resident alien status comes with several advantages, but no matter where in the world you live and earn it also means you’re responsible for filing a tax return — and paying taxes when required — to the U.S. government.

Jennifer Samuel, senior tax product specialist for Credit Karma, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.