7 Common Myths About US Expat Taxes

Every day, we encounter myths surrounding US expat taxes. Let’s break down what’s true, and what isn’t.

Myth #1: Earning Less Than the FEIE Means Expats Don’t Need to File

Many US expats mistakenly believe they do not need to file a US tax return when their income falls below the Foreign Earned Income Exclusion (FEIE) threshold. This is a common misconception! Expats must file if their income meets certain thresholds based on their filing status, which can be as little as $5 for those filing under Married Filing Separately, regardless of whether they qualify for the FEIE.

For the 2024 tax year, the FEIE allows expats to exclude $126,500 of foreign earned income from US taxation to avoid double taxation. However, to take advantage of this exclusion, expats must meet one of two eligibility tests:

• Physical Presence Test: Expats must be physically present in a foreign country for at least 330 days within a 12-month period.
• Bona Fide Residence Test: Expats must be residents of a foreign country for an entire tax year, though this can be more complicated depending on the individual’s situation.

After confirming that the FEIE applies to their situation, expats must file Form 2555 (FEIE) as part of their tax return. Using a platform like MyExpatTaxes makes this process easy and efficient.

Myth #2: Expats Can Avoid Filing US Taxes by Renouncing Citizenship

While renouncing US citizenship can end future US tax obligations, it does not eliminate past liabilities. Expats must catch up on their US expat taxes to properly renounce American citizenship. This could require using the Streamlined Procedure. With the Streamlined Procedure, expats can file tax returns from the previous three years and six years of FBARs. Then they must continue filing until they have five past years on record, after which they can prepare their final tax return for the year of renunciation and file it as a ‘dual return.’

Renouncing citizenship may trigger an “exit tax” on certain assets if they are above a certain threshold.

Myth #3: The US Tax System is the Same for all Expats

Many expats assume that the US tax system applies the same way to every US citizen or resident living abroad. However, this couldn’t be further from the truth. The tax requirements for expats vary based on factors like income level, country of residence, and whether they are self-employed.

For instance, self-employed expats face unique challenges. Even if you’re living and working abroad, the US still expects you to pay Social Security and Medicare taxes, which can create additional complexity. These taxes typically apply to income earned in the US, but for self-employed expats, they also apply to foreign income, making the tax bill higher than expected.

Additionally, tax laws can change based on the host country. Some countries have tax treaties with the US that may reduce the taxes expats owe to both the US and their host country. Others don’t, which could leave US expats dealing with double taxation unless they take advantage of credits or exclusions.

Ultimately, there’s no one-size-fits-all approach to expat taxes. Each situation is unique, so it’s essential to understand your specific obligations based on your circumstances and consult a Tax Professional to ensure correct filing.

Myth #4: Expats Must Include Foreign Spouses on Your Return

Married to a non-US resident or citizen? No, you do not need to get them a US ITIN and include their income on your US tax return if you don’t want to.

Filing as Married Filing Separately is the move! This is the default filing status for US citizens married to nonresident aliens. However, for those US expats married to a nonresident alien, you may also qualify to file as Head of Household under certain conditions. To be eligible for this status, you must pay more than half of the household expenses, have dependents who live with you, and ensure they have a valid US Social Security number.

In short, you do not need to include foreign spouses on a US expat tax return as long as they do not have US-sourced income!

Myth #5: Expats are Automatically Exempt from Paying US Taxes if They Live in a Tax-Free Country

Many expats believe living in a tax-free country automatically exempts them from US taxes. However, the US taxes its citizens on worldwide income, no matter where they live.

For example, an American expat living in the UAE, a country with no income tax, might assume they don’t need to file a US tax return. In reality, they are still required to file with the IRS. While they may qualify for benefits like the Foreign Earned Income Exclusion (FEIE) to reduce their US tax liability, it doesn’t mean they are entirely exempt from filing because the UAE isn’t taxing them! Higher earners in these low/no tax countries can face US tax liabilities if their income exceeds the FEIE allowed exclusion amount, as they won’t have many foreign tax credits to claim. e

Myth #6: The IRS Will Never Find Out About Foreign Income or Assets

Unfortunately, this is a misconception. The United States has established agreements with numerous countries to exchange financial data, and the IRS utilizes information from foreign banks, governments, and financial institutions to monitor US expat tax compliance.

Expats who have opened foreign bank accounts are likely familiar with the extensive documentation required under FATCA (Foreign Account Tax Compliance Act) before opening an account.

Depending on the country of residence and the financial institution’s policies, US expats may face difficulties opening a bank account if the local bank is unwilling to comply with reporting requirements to FinCEN (Financial Crimes Enforcement Network).

Myth #7: US Tax Returns for Expats Are Easy to File and Don’t Require Any Special Knowledge

US expat taxes can be very complicated because one must navigate both US tax laws and the tax laws of the host country.

Filing tax returns, especially if you have foreign income, investments, or assets, often requires expertise in international tax matters to avoid mistakes, penalties, and missed deductions.

Not to worry, MyExpatTaxes was created by expats, for expats. We understand the struggle of filing a US tax return abroad and are ready to help you in 2025!

Get started for free, pick a plan when you’re ready. Or see the Pricing Page for all the details.