It’s tax season again, and if you are an American citizen living abroad, you may be wondering how to do your own taxes now that you live in a foreign country. For example, you might need to report your foreign bank accounts or claim a credit for your foreign income. While living abroad does make doing your U.S. taxes a bit more complicated, it is not impossible to do them yourself.
Christie DuChateau, one of the partners at BNC Tax, recently conducted an online course instructing students on how to do your own taxes when you live abroad.
In the course, Christie detailed the forms that must be filed, what they are used for, and how to fill them out properly.
In case you missed the course, a summary of the information is below. We’ve compiled a list of the most common forms that BNC Tax prepares and files for Americans living abroad.
For example, a “simple” return for a working expat would have Form 1040, Schedule 1, Schedule 3, Schedule B, Form 1116, Form 2555 and the FBAR.
Please read through the information carefully so you will know which forms apply to you.
This is the main form that all taxpayers must fill out. This includes your contact information, other personal information, and a summary of your income and your deductions. This form has the calculations from the other tax forms that are part of your tax return, and it shows whether you owe money or will be receiving a refund.
Schedule1 and Schedule 3
Schedule 1 and Schedule 3 are required to report information calculated on subsequent forms.
Schedule B is used to report interest, dividends, and foreign bank accounts. If you have any of these, you’ll need to fill out Schedule B. Indicate foreign bank accounts by checking the checkbox at the bottom of this form.
Form 1116 is for the foreign tax credit. To learn about the difference between the foreign tax credit and the foreign earned income exclusion (FEIE) and why you would want to claim one or the other, please read our blog on this topic. At BNC Tax, we prefer to use the foreign tax credit for our clients if possible, but we specialize in optimizing between the two options.
Form 2555 is used to claim the foreign earned income exclusion (FEIE). The FEIE is available to Americans living abroad who earn less than an income cap specified by the IRS ($107,600 USD for individuals in 2020). There are several reasons why you might decide to claim this exclusion, or not to claim it. In order to claim this exclusion you need to have earned income (income from working at a job or from self-employment), and you need to meet specific qualifications such as the Physical Presence Test or the Bona Fide Residence Test. Also, remember that once you claim the FEIE, you are in this system for 5 years, so you need to think carefully about what your next 5 years are going to look like, and whether you want to continue claiming the FEIE for 5 years. Read our blog post to learn more about the foreign earned income exclusion.
This form is for reporting foreign bank accounts, and is required for anyone who has a sum total of $10,000 when adding together the highest balances at any time during the year in each account. You need to report the highest balance at any time during the year of every foreign bank account that you have, if those high balances total $10,000 or more when added together.
Tips for How to Do Your Own Taxes
- Use the IRS yearly average exchange rate to convert your foreign income to U.S. dollars on the 1040 and other forms.
- However, for form FINCIN114 (FBAR) you must use the Department of the Treasury exchange rate from the last day of the year. You can find this on the Department of the Treasury website.
- To optimize between the foreign earned income exclusion (FEIE) and foreign tax credit, try preparing your return with and without the FEIE to see which way benefits you more. But remember, if you elect the FEIE, you will be in that program for 5 years.
- Don’t forget to check the box at the bottom of Schedule B if you have foreign bank accounts. People sometimes miss this checkbox.
Now that you’ve read about how to do your own taxes, it’s time to get started! You can download all of these forms and their instructions from the IRS website at www.IRS.gov
The IRS also has a calculator on their website that estimates approximately how long each form should take to fill out. In our practice, we have found that it takes about 13 hours in total to prepare a tax return for an American living abroad. So block out some time over a couple of days so you can tackle it.
If you are married filing separately with a non-resident alien spouse, you can use an online software such as TaxAct (www.taxact.com), which will guide you through each form and help you E-file your return. TaxAct requires a U.S. phone number.
You can also use TurboTax, but if you’re married to a non-resident alien spouse, you’ll need to mail the return to the IRS via postal mail, because TurboTax doesn’t support e-filing for taxpayers married to non-resident aliens. Be advised that sending your return by postal mail can significantly delay your refund.
Join Our Next Online Course
Christie will be offering another online course specifically for U.S. citizens who live in the Netherlands and want to learn how to do their own taxes. Sign up here!
If you prefer to have a professional tax preparer do your taxes for you, BNC Tax is here to help. Our international team supports American citizens living in 25 countries. With 18 years in the business, we have filed over 6,000 tax returns for our clients. We are experts in the specific tax issues that Americans abroad face.
Our services include personal tax preparation, business tax preparation, FINCEN reporting (FBAR), individual and corporate accounting services and consulting, Streamline filing, FACTA reporting, and more.
We have a secure online portal where you can upload your documents. We work remotely with all of our clients!
If you are located in the Netherlands or Mexico, you may schedule an in-person meeting at our offices in Amsterdam or Puerto Vallarta.