Filing US tax Return for the first time
An overview of what you need to know as an American filing from abroad
As a first-time US tax filer, it can be overwhelming working out all of the details you need to know for a successful US tax return submission.
This article is aimed to help Americans filing their first US tax return from abroad. We have summarized some of the most common questions we get asked. Feel free to get in touch with your own personal questions and one of our US Expatriate Accountants will be happy to help.
Skip to the questions you need answered
Do I Need to File a US Tax Return?
Whether or no you need to file taxes as an American citizen living abroad depends on many variables. We have gone into more details in the State and Federal tax section of this article.
Generally, whether you need to file or not is dependent on a few key areas, these may be (but are not limited too:
Income
Tax Filing Status
Age
In some cases, even if you are not obligated to file federal or state taxes, it can be advantageous reasons to file due to potential tax refunds/ reimbursements:
Some indicators that it may be beneficial to file include:
You had income tax withheld from your paychecks.
You made estimated tax payments or had last year’s refund applied to this year’s estimated tax.
You qualify for certain tax credits.
What U.S Tax Filing Procedure Do I Use?
One of the very first things to consider when you first begin your US tax return filing is “Do I have any overdue US tax returns?”/ “Do I need to file past US tax returns”
The answer to this question will determine what US tax filing process you should be filing under.
If you do not have any overdue US tax returns you can file through the regular filing process
If you have overdue taxes you will either have to file through the Streamlined Filing Procedure or file the years you are behind
Read our article “how to work out if you have to file past US taxes” if you are unsure if you have any overdue US taxes.
What is the difference between state and federal Income tax?
It is important to understand the difference between State and Federal tax filing and how your filing obligations may differ with each.
Federal Income Tax
What is it?
How is it calculated?
How is it paid? How to claim a refund?
What does federal income tax pay for?
Federal income tax is tax collected by the IRS from every person who is obligated to file a US tax Return.
One of the main purposes of filing a US federal tax return is to calculate is any federal income tax is owed to or from the IRS.
Federal income tax is calculated through a number of variables which include:
Your annual income
Your tax deductible expenses and tax reliefs (US expatriates are entitled to a number of specialist reliefs such as FEIE- Form 2555 and FTC -Form 1116)
The industry you work in (i.e. there are special deductions for military )
What country do you reside in? (US Expatriates that live in a country in the dual taxation treaty are protected against the risk of being taxed twice on income).
How do you pay federal tax?
Go to this link to find out how to pay the IRS
How do you claim a federal tax refund?
You can claim a tax refund from the IRS by filing your annual U.S. tax return. This will include a justification and calculation of your personal U.S. tax refund.
What does federal income tax go towards?
What federal income tax goes towards depends on the current elected government and their policies. Generally, federal taxes go towards Health programs, Social Security, Defense and Security, Education and Technological Development
State Income Tax
What is it?
How is it calculated?
How is it paid? How to claim a refund?
What does state income tax pay for?
Whereas all US citizens can become eligible for Federal Income tax, State Income Tax is applied to those who are a citizen of a particular state.
Whether or not you need to file state taxes while living abroad depends on the state you last lived (or were considered a resident of), if you're still considered a resident of that state, and if you make income in that state
Some factors that can influence whether your State Tax Department regards you as a state resident include:
Where your car is registered
If you have a driver's license or state ID
Where you are registered to vote
If you own any property or have mortgage/lease payments on any property in the state
If you pay any utility bills in the state
Where your family lives
The permanence of your overseas assignment
Your financial assets and accounts within the state
It should be noted that some states still require Americans living abroad to file their state taxes even when they are not regarded as a state resident
How is state income tax calculated?
Generally states use on of the twp approaches below for taxing residents
No tax
Flat rate tax. That means they tax all income, or dividends and interest only in some cases, at the same rate.
Progressive rate tax. That means people with higher taxable incomes pay higher state income tax rates.
State income tax is calculated through a number of variables which include:
Your annual income
Your tax deductible expenses and tax reliefs (US expatriates are entitled to a number of specialist reliefs such as FEIE- Form 2555 and FTC -Form 1116)
The industry you work in (i.e. there are special deductions for military )
What country do you reside in? (US Expatriates that live in a country in the dual taxation treaty are protected against the risk of being taxed twice on income).
How to pay state tax?
Each state has their own payment systems that are expressed on their website
What do state taxes go towards
Similarly to Federal taxes, What State income tax goes towards depends on the current elected government and their policies. Examples of how state taxes are spent:
Education
Transport
Corrections Facilities
Low Income assistance
Environmental programs
U.S. state income tax can be particularly complex as the rules vary from state to state.
For a guide to filing in your specific state please enter your email below:
What Income Needs to Be Declared on your U.S. Expatriate Federal And State Tax Returns?
For U.S. expatriates there are a lot of factors that need to be considered when identifying what income needs to be declared on your U.S. federal and state tax return.
The IRS Publication 525 (2021), Taxable and Nontaxable Income may be a useful resource- however, we advise to speak to a U.S. Expatriate tax adviser as rules for Americans abroad can often vary
Our U.S. Expatriate Accountants are always free for a video or phone call. Feel free to book in a time on our U.S. tax consultation booker.
Will I Owe the IRS Tax as an American living Abroad?
Whether or not you will owe tax as an American living abroad will depend on a number of factors. Which includes:
Your annual income
Your tax deductible expenses and tax reliefs (US expatriates are entitled to a number of specialist reliefs such as FEIE- Form 2555 and FTC -Form 1116)
The industry you work in (i.e. there are special deductions for military )
What country do you reside in? (US Expatriates that live in a country in the dual taxation treaty are protected against the risk of being taxed twice on income).
What income you have already paid tax on in other countries
Will I have penalties from the IRS?
If you owe tax to the IRS and have failed to file there can be a Failure-to-File penalty that is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, there's also a minimum penalty for late filing; it's the lesser of $435 or 100% of what you owe.
Appealing penalties
There are amnesty programmes such as the Streamlined Filing Procedure that can allow individuals to submit overdue U.S. tax returns and avoid penalties.
Penalties can also be appealed in several circumstances for instance if you had not realized you had to file a U.S. tax return or if there were issues that prevented you from filing/paying on time
A Break Down of the Different Tax Forms
The purpose of this article is not to go into detail about every single form (there are over 800), however, your personal situation will determine what forms you will be required to submit when filing your tax return. You can view more information about some of the individual forms below.
Form 8621 - Shareholder of a Passive Foreign Investment Company
FINCEN Form 114 - Report of Foreign Bank and Financial Accounts
If you are unsure about which form to file, we always suggest that it is worth consulting a tax professional. Feel free to contact on of our chartered U.S. expatriate tax advisers for advice
The Documents you will need to complete your U.S. Tax Return
When it comes time to file your federal tax return, you will need access to various documents relating to personal information and your earned income in the given tax year. Below is a short list of some of what you may need to have.
Social Security numbers, for yourself, as well as for your spouse and dependents, if any
W-2 form (Check the form list above for more information)
1099 Forms
Retirement contributions
Property taxes and mortgage interest
Charitable Donations
State and local taxes you paid
Educational expenses
Un-reimbursed medical bills
Last Year’s federal and state tax returns
You may need more information than this depending on your circumstance. Again if you are unsure we highly recommend seeking a tax professional.
Can I file a US tax return myself?
Absolutely, some of our clients after one year of filing with us feel empowered to take the information we have provided them and file themselves in following years.
It really does depend on how complex your tax matters are and your confidence in dealing with tax systems and figures.
The U.S. tax system is a much more complex one than most with high potential for steep penalties, so of course we always advise you to speak to a tax professional to advise you on your filing
We hope this helped!
As chartered accountants and tax advisers for American citizens living worldwide we make it our business to share our knowledge whether you are a client of ours or a researching U.S. expatriate.
The U.S. tax system can be an extremely daunting one to navigate and if you do find yourself considering support, feel free to arrange a no-pressure, no-commitment call with us to go over what filing your U.S. expat taxes with us may look like.