US taxes in Europe: What Americans living abroad need to know

Understanding citizenship-based taxation 

The United States tax is based on citizenship, not residency. If you’re a US citizen or a lawful Green Card holder, you’re required to file a US federal income tax return every year reporting your worldwide income. This applies regardless of whether you live and work in France, Germany, Spain, or any other European country, in addition to the income tax you need to file in your new country.

While the prospect of double taxation sounds concerning, it is not inevitable. The Internal Revenue Service (IRS) of the United States offers several exclusions to protect you from paying taxes in two countries on the same income. However, these exemptions aren’t automatic; you need to claim them when you file your general tax return.

Avoiding double taxation: The FEIE and the FTC 

Citizens living abroad have access to two relevant tools they use to greatly avoid and minimise their US tax bill:

• The Foreign Earned Income Exclusion (FEIE) allows qualifying Americans to exclude up to $130.000 of their foreign earned wages from US taxation. These numbers are subject to annual inflation adjustments. To qualify, you must pass one of two tests proving you live abroad: the Physical Presence Test or the Bona Fide Residence Test. 
• The Foreign Tax Credit (FTC) allows you to reduce your US taxes dollar for dollar by the amount of taxes you’ve already paid to your host country. 

Income tax rates in most European countries are significantly higher than the US federal rate. This makes the Foreign Tax Credit especially valuable for many expats, as it often eliminates their US tax bill altogether and may even create excess credits they can carry forward to future years. 

Contact 1040 Abroad for help with your US taxes

Reporting requirements for foreign accounts: FBAR and FATCA 

Opening a separate European bank account to pay rent, receive your paycheck, and purchase groceries is natural when moving overseas. Because the US government tracks resources in foreign bank accounts, there are different filing requirements to be aware of.

Report of Foreign Bank and Financial Accounts (FBAR)

If at any time during the calendar year the aggregate balance of all of your financial accounts outside of the US exceeds $10.000, including bank accounts, investment accounts, custody accounts except European pensions, you must report those accounts to the Financial Crimes Enforcement Network (FinCEN) by filing a Report of Foreign Bank and Financial Accounts (FBAR). 

A common mistake is assuming you only need to report if a single account exceeds $ 10.000. The $ 10.000 threshold applies to the combined maximum balance of all your foreign financial accounts.

Foreign Account Tax Compliance Act (FATCA)

You may also need to file Form 8938 with your tax return if you exceed certain thresholds of foreign financial assets. The Foreign Account Tax Compliance Act (FATCA) is a little-known IRS tax, completely separate from your regular income tax return and FBAR. 

For most Americans abroad, FATCA is a non-issue because it allows your foreign bank to report your account balance to the IRS anyway.

Owing taxes from last year

Moving abroad as an American can come with surprises. Some people don’t know they have to file US taxes from abroad until they apply for a passport or open a local bank account. Situations like these are completely normal and don’t call for panic.

The Streamlined Foreign Offshore Procedures program by the IRS will help you. If you qualify, you can file your past due tax returns of up to three years and FBARs up to six years without paying late filing penalties or failure-to-pay penalties. However, you must certify that your non-filing was non-willful, as you genuinely didn’t know you had to file.