Yes. Unlike the vast majority of countries in the world, the U.S. taxes its citizens on worldwide income – which means that if you are a United States citizen with income over the filing threshold, then you should be filing a U.S. income tax return each and every year. For 2014, the threshold for individuals under 65 was $10,150 of gross income per person, if Single or Married Filing Jointly.
If you’re self-employed, the income threshold is much lower – you must file a tax return if you made $400 or more of self-employment income.
The IRS provides a tool to help you decide if you need to file a tax return:
If you’re a foreign resident and you think you may need to file tax returns for multiple years, there’s a streamlined process in place to help people like you get caught up. Contact us and let us know, we can help explain your options.But that’s ridiculous! I already pay taxes in my country of residence!
The good news is that there are a variety of exclusions, credits and tax treaties in place that will help protect you from double taxation.
Your first option is the Foreign Earned Income Exclusion. In 2015, you can exclude up to $100,800 of income from U.S. income tax. Additionally, you may qualify to exclude or deduct amounts paid for housing.
Your second option is the Foreign Tax Credit. This gives you credit for some or all of you’re the foreign income taxes that you paid. Note, that you can’t use the Foreign Earned Income Exclusions AND the Foreign Tax Credit for the same income. Most people will use the Foreign Earned Income Exclusion first and only use the Foreign Tax Credit for income that is not covered by the exclusion (such as earned income above the limit or investment income).How do I know if I qualify for the Foreign Earned Income Exclusion?
There are two ways.
1. You are a “bona fide” resident of a foreign country for the entire tax year.
The Bona Fide Resident Test applies if you are a legal resident of the foreign country – usually on a long-term work contract, or as a permanent resident or citizen of that country. It does NOT apply if you are on a tourist visa, or you have overstayed a visa and are not a legal resident.
2. You were out of the United States for 330 days for a 12 month period.
It doesn’t matter why you were away from the United States or how many different countries make up your time way. As long as you were not in the United States for more than 35 days, you meet the Physical Presence Test. That 12 month period does not have to run from January 1 to December 31, so it may be possible to cover some of the tax year, even if you returned to the United States for more than 35 days.What about Social-Security, Medicare and Self-Employment Taxes?
The Foreign Earned Income Exclusion doesn’t exempt you from Social Security and Medicare taxes. Self-Employment Taxes are also not excluded, because they are the equivalent of Social-Security and Medicare taxes.
There are a variety of tax treaties that may come into play and exempt you from Social Security, Medicare and Self-employment taxes. In essence, if you are already paying into a social security type of system in your country of residence, then there is a high likelihood that the foreign country has a tax treaty with the United States that will prevent double taxation. Usually, you only ever have to pay into one social security system.
If your country of residence doesn’t have a pension system or if you’re not paying into it, or if there is no tax treaty, then in all likelihood, you will need to pay Social Security, Medicare and Self-employment taxes. The good news is that Social Security can be collected even if you are retired abroad.
The minefield of non-resident returns can be complicated! Let Stonecreek Accounting take the burden off your shoulders and help you file your tax returns.