US Tax Basics for US Expats

The US and Eritrea are the only two countries in the world that tax based on citizenship rather than just residency. That is, all US citizens and permanent residents ("US persons") whose gross income is at least as much as the standard deduction in US dollars for the year must file a return with the IRS, no matter where they live and no matter where the income is derived from. The standard deduction, for the 2019 tax year, is $12,200 for single taxpayers and married individuals filing separately, $18,350 for heads of households, and $24,400 for married filing jointly.

Note that for the purpose of US income tax, permanent residents remain permanent residents until they voluntarily renounce green card status, or their permanent residence is terminated by USCIS or a US federal court.

Also, for the 2019 tax year, all US persons who have at least $400 of self-employment income must file a US tax return, even if gross income is below the standard deduction amounts listed above.

You can also try the IRS's Do I Need to File a Tax Return? tool.

US persons can use the Foreign Earned Income Exclusion and/or the Foreign Tax Credit to eliminate or reduce double taxation.

Generally, if both your tax home and your abode are outside the United States and Puerto Rico on the regular April 15 due date, you get an automatic 2 month extension to June 15 to file. Note, however, that this is not an extension to pay; any balance due must be made by the original April 15 due date. So you should try your best to calculate both US and Canadian tax before April 15 in order to pay any US balance due in time. The April 30 due date for Canada is not extendable. You need to calculate both US and Canada tax liability before foreign tax credit in order to compute the foreign tax credits to take on each return.

Since I assume most expats have been doing US taxes for a while, and there are plenty of resources to learn about US tax, I cover only the aspects relevant to US expats (used loosely to mean US citizens and permanent residents living outside the US). I reference Canada, but a lot of this information applies to US persons living in other foreign countries as well.

List of Possibly Required US Tax Forms

Income Tax Return Forms

The following US tax forms often need to be filed by US persons living abroad:

• Form 1040, U.S. Individual Income Tax Return, and its related schedules (start with what you used to file and eliminate the ones that are no longer relevant)


• Form 2555, Foreign Earned Income Exclusion and Foreign Housing Exclusion. If you meet the bona fide residence test or the physical presence test, you can exclude from US taxable income foreign earned income up to the limit, which is $105,900 for tax year 2019; for earned income above this limit, as well as unearned income, you can claim the foreign tax credit (discussed next). and employer-paid foreign housing amounts or deduct foreign housing expenses,
• Unless you move on January 1, you won't meet the bona fide residence test for your first tax year abroad. Since the physical presence test just requires that you have at least 330 full days of physical presence abroad in any period of 12 consecutive months starting or ending in the tax year, it is realistic to meet this test in your first year abroad.
• You can wait until the 12 month period ends to file your US tax return for your first year abroad in order to meet the physical presence test. Taxpayers living abroad on the normal April 15 tax return due date get an automatic 2 month extension to June 15 to file and can also request the normal extension until October 15 via Form 4868. That should be enough time for most people to meet the physical presence test. If you moved later in the year and earned enough in those last months that it would be better to take the foreign earned income exclusion instead of the foreign tax credit for that first tax year, you can file Form 2350 to get an additional extension beyond October 15.
• Note that once you choose to exclude your foreign earned income or housing amount, that choice remains in effect for that year and all later years unless you revoke it. Once you revoke the choice, if, within 5 years, you want to take the foreign earned income exclusion, you must apply for IRS approval.


• Form 1116, Foreign Tax Credit. Use this to claim a credit for foreign income tax paid on income not excluded on Form 2555.
  • Both the US and Canada calculate the foreign tax paid in a similar way; the credit, for US tax, is the lesser of the foreign tax paid or the total US tax liability before the credit multiplied by the percentage of taxable foreign income over taxable worldwide income (i.e., the tax that the US would charge on that foreign income). In other words, you can only wipe out what the US would charge on that foreign income, even if the Canadian tax you paid was more. The excess carries over to future years, but only within the same bucket:
  • The US requires you to calculate the foreign tax credit separately over 7 categories of income, and an excess foreign tax credit in one category cannot be used to offset tax in another category. For example, if you paid more foreign tax in the passive category than the US would have charged you but less foreign tax in the general category than the US would have charged you, you can't use the excess credit in the passive category to offset your US tax due in the general category. The 7 categories are:
  1. Section 951A income
  2. Foreign branch income
  3. Passive category income
  4. General category income
  5. Section 901(j) income
  6. Certain income re-sourced by treaty
  7. Lump-sum distributions
  • Most people usually have only passive category (dividends, interest, royalties, rents, annuities, nonbusiness capital gains) and general category (wages, business income) income.
  • Canada, on the other hand, had only two categories: non-business income and business income.
  • If you also qualify to take the foreign earned income exclusion, you should calculate your taxes taking the foreign earned income exclusion and foreign tax credit and see which gives a better result, both for the current year and anticipated future years.
  • For countries with no income tax or lower tax rates than those of US, one should take the foreign earned income exclusion, as there would be little to no foreign tax to take a credit on the US return.
  • For countries such as Canada with generally higher tax rates than those of the US, it can be better to take the foreign tax credit rather than the foreign earned income exclusion, especially if you expect to have any additional income in the same category in future years that is taxed in the US but not in the foreign country; then you would be able to utilize the foreign tax credit carryover.
  • However, less of the earned income is taxed in Canada than in the US, for example, if you take the RRSP contribution deduction in Canada but do not qualify to do so in the US, then the foreign earned income exclusion could work better.


• Form 8833, Treaty Based Position Disclosure - for various tax treaty (such as the US-Canada Income Tax Treaty) elections that may be required in your US tax return. You must file this form whenever you take advantage of an exemption in a tax treaty that is not otherwise available in the tax codes, for example, when electing under Article XVIII of the US-Canada Tax Treaty to exclude contributions to an employer sponsored group RRSP plan from US income.


• Form 8621, Passive Foreign Investment Corporations - reports interest in non-US mutual funds and ETFs; avoid investing in these outside of a retirement account in order not to file this form and pay punitively high taxes on earnings.

Foreign Disclosure Forms

The FBAR and 8938 disclosure forms are especially important, because failure to file these forms could result in minimum penalties of $10,000 for non-willful infractions:

• FinCen Report 114, Report of Foreign Bank and Financial Accounts (previously Form TDF 90-22.1), aka FBAR. Due April 15, but FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year. Accordingly, specific requests for this extension are not required.


• Form 8938, Specified Foreign Financial Assets. File with your tax return. Due on the tax return due date (including extensions). Do I need to file?


• Comparison of FBAR and Form 8938 filing requirements

To facilitate preparation of FBAR, Form 8938, and Canada's T1135, I keep a spreadsheet listing all of my bank, investment, and retirement accounts in both countries.

Note that on both FBAR and Form 8938, if you are required to file, you need to list all foreign accounts that were open at any time during the year, even if you never used the accounts and you closed them during the year. I realized this after filing my FBAR and remembering the unused accounts that some zealous Canadian bankers had opened for me that I had closed after a few months; I filed an amended FBAR to report those accounts. US currency accounts, including the ones at TD Canada that I recommend, also need to be reported on both FBAR and Form 8938.

Other Forms

The following forms may also be required for certain persons:

• Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships


• Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations (for US persons with at least a 10% ownership interest in a Controlled Foreign Corporation, using complex rules of direct, indirect, and constructive ownership)


• Form 3520-A and Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Foreign Gifts (for U.S. owners or beneficiaries of Canadian RESPs or certain tax free savings accounts)

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Important warning! I do not provide tax, legal or accounting advice. I am writing this guide only for informational purposes, and based heavily on my own unique personal facts and circumstances. And I am a unique individual with a unique background and my unique set of personal facts and circumstances, so what is applicable to me might not be applicable to you. This guide, like all other content in this blog, is not intended to provide, and cannot be relied on for, tax, legal or accounting advice. You are responsible for consulting your own tax, legal and accounting advisors to obtain advice on your personal situation.