Do You Need to File US Tax Returns While Working Outside the US?

It may seem counterintuitive to a US citizen or permanent resident (i.e., a green card holder) who has just taken a new international job, that most will still be required to file US federal income tax returns after relocating. In addition to filing income tax returns, mobile employees may also have other filing obligations including estate or gift tax returns, estimated tax payments, and foreign bank account reports.

Although the US tax code provides credits and exemptions that allow international filers to minimize, or even eliminate their US federal tax obligations, that does not relieve most US citizens or green card holders of their filing requirements. Failing to file may lead to large penalties and the loss of some of the benefits US taxpayers enjoy while employed internationally.

Which International Residents Need to File US Returns?

As a general rule, all US citizens and permanent residents must file US federal form 1040 as if they were still living in the United States. However, US taxpayers working outside of the US who do not meet the IRS’ gross income thresholds may not be required to file. For 2019, the threshold is $12,200 for a single taxpayer, and $24,400 for married taxpayers filing jointly. The thresholds are slightly higher for US taxpayers over the age of 65.

Self-employed individuals do not receive the benefit of the IRS filing thresholds. They are required to file a return if their net earnings from self-employment total $400 or more.

As there can be other filings (e.g., forms related to ownership in a foreign corporation) or considerations relating to filing an income tax return, taxpayers should consult a tax professional in determining their own requirements.

What income needs to be reported?

The IRS requires US citizens and permanent residents to report their gross worldwide income for the tax year, which includes all income received in the form of money, goods, property, or services. Payments in foreign currency need to be reported in US dollars.

Mobile employees must also remember that the rules for exempt income may be different in their Host country than they are in the United States, and some income which is not taxable in the Host country may still be taxable in the United States. The end result may be that a taxpayer will need to report different amounts of taxable income for the United States and the Host country.

Avoiding Double Taxation on International Income

The US tax code features two mechanisms to help US taxpayers avoid paying income tax on some, or all income that has already been subject to taxes in the Host country. One mechanism is the foreign tax credit, which essentially allows an international taxpayer to apply income tax paid to their Host country against their US income tax obligation related to this foreign source income. The second mechanism is the foreign earned income exclusion, which allows a taxpayer to exclude income of up to $105,900 for the 2019 tax year.  Both employees and self-employed individuals may take advantage of the foreign earned income exclusion. However, failing to file on a timely basis may prevent taxpayers from taking advantage of these tax relief opportunities. 

Federal Filing Obligations Go Beyond Form 1040

In addition to reporting their income, US taxpayers working outside of the US may have other filing requirements related to their financial accounts. These primarily consist of complying with the Foreign Account Tax Compliance Act (FATCA) and filing a Report of Foreign Bank and Financial Accounts (FBAR). Just like the federal income tax filing requirements, international taxpayers who fail to comply with these additional filing requirements also face hefty fines.

FATCA requires that taxpayers disclose foreign assets that exceed the specified level for their filing status and residency. An individual that is required to file under FATCA must file a Form 8938 with their federal return, or face a $10,000 failure to file penalty. Other penalties for failure to file include a 40% penalty on the tax understatement attributable to the undisclosed assets.

To ensure compliance with FATCA, the act requires certain international financial institutions to report information related to financial accounts held by US citizens and green card holders directly to the IRS. Those financial institutions must also report accounts held by entities in which a US taxpayer holds a substantial ownership interest.

If a US taxpayer has foreign financial accounts that total more than $10,000 at any point during a calendar year, the taxpayer is required to file an FBAR with the US Department of Treasury. The report is not part of the US federal income tax return, but significant financial penalties and criminal charges may be applied to US taxpayers who fail to disclose foreign accounts subject to the reporting requirements.

International Employees May Still Have State Filing Obligations

Some states may consider mobile employees operating outside the US to be doing so on a temporary basis, and find them to still be residents for state income tax purposes. In some cases, a state may consider mobile employees who have been working outside the US for years to still be residents. While some states offer these mobile employees foreign tax credits, or exclusions similar to those offered on the federal level, some do not. Therefore, mobile employees should make sure they are complying with any state filing obligations while working internationally.

Mobility Tax Service Providers Can Help

Mobility tax service providers understand the federal and state filing requirements that may apply to cross-border mobile employees. They provide tax planning that both ensures the employees are in compliance with applicable laws, and help to mitigate double taxation on their income. Mobility tax service providers may also help mobile employees who have failed to keep current with their filing obligations by assisting them with back filings or amended returns. However, if a mobile employee is facing possible criminal charges for failing to report income to the IRS, or for not disclosing financial accounts, an attorney may be necessary to help resolve the issue.

The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.