But before you jump to claim the FEIE, there are a few things you should know:

• If used properly, the FEIE can save you thousands of dollars on your United States taxes
• It’s not a blanket foreign income exclusion — there are stipulations on what you can exclude and what you can’t
• You don’t automatically get the FEIE — you need to meet specific qualifications and then file the proper paperwork (Form 2555)
• The FEIE isn’t your only tax relief option — you should ask your Tax Advisor what options are available to you based on your specific situation.

U.S. taxes for expats aren’t easy. Let our experienced Expat Tax Advisors help prepare your tax return this year to ensure the foreign earned income tax exclusion is elected when it is most beneficial to you. Ready to claim the FEIE? We’ve got a tax solution for you — whether you want to DIY your expat taxes or leave it to one of our experienced Tax Advisors. Head on over to our Ways to File page to choose your journey and get started.

What foreign income can you exclude with the FEIE?

The Foreign Earned Income Exclusion can help reduce or eliminate U.S. taxes on foreign income earned while working abroad, but it doesn’t apply to all sources of income.

This exclusion is only available for earned income and doesn’t apply to passive or investment income such as interest and dividends. Foreign earned income includes:

• Salary
• Wages
• Bonuses
• Commissions
• Self-employment income

All income must have been earned in a foreign country to count as foreign earned income.

Note: You might qualify for the foreign earned income exclusion even if the country in which you’re working doesn’t assess income tax on compensation, like the UAE.

Who qualifies for the Foreign Earned Income Exclusion?

The foreign income tax exclusion applies to those who have lived abroad for a certain period of time within the tax year. However, partial-year exclusions are available if you’ve recently moved to a foreign country or returned to the U.S. mid-year.

The FEIE is available to expats who either:

• Work outside the U.S. as employees, whether for a U.S. or non-U.S. employer
• Work outside the U.S in a self-employed or partner capacity
• Pass either the Bona Fide Residence Test or the Physical Presence Test

Employees of the U.S. government can’t claim the foreign income exclusion. However, an employee of a private company under contract with the U.S. government might still be eligible.

Passing the Bona Fide Residence Test

To qualify as a Bona Fide Resident and pass the test, you must prove that you have more ties to a foreign country than the U.S. You also must be a resident of that country for an uninterrupted period that includes an entire tax year. When and if you go back to the U.S., you must have the intention of returning to your current foreign country of residence. In addition, you must:

• Be a U.S. citizen or be a resident alien of a foreign country with which the U.S. has an income tax treaty.
• Earn active income. Unearned, or inactive, income like pension payouts, interest, and dividends cannot be included.
• Be overseas for work for a period longer than a year.
• Have a permanent place of work in a foreign country.

It is possible to be a Bona Fide Resident for part of the year if you spent at least a full tax year outside the U.S. in a prior year. As a result, you can claim the FEIE for part of the year.

Passing the Physical Presence Test

To qualify under the Physical Presence Test, you must have been living outside the U.S. for 330 full days out of the year. Be careful when you track your time, because a “full day” counts as 24 hours starting at midnight, and you need to be in-country for every minute of those 24 hours.

For example, if you lived in Windsor, Canada and popped over the border to Detroit for Friday night and came back Saturday evening, you wouldn’t be able to count that time towards your 330 full days.

How much foreign income can I exclude?

If you’re an expat and you qualify for a Foreign Earned Income Exclusion from your U.S. taxes, you can exclude up to $112,000 or even more if you incurred housing costs in 2022. (Exclusion is adjusted annually for inflation). For your 2023 tax filing, the maximum exclusion is $120,000 of foreign earned income. If you’re married and both of you meet either the bona fide residency test or the physical presence test, you can each claim the FEIE.

Foreign Tax Credit vs. Foreign Earned Income Exclusion

It’s important to choose between the foreign income exclusion vs. foreign tax credit wisely. If you claim the exclusion and then change back to the foreign tax credit, you can’t claim the exclusion again for five years. The only way to claim the exclusion again involves a costly process with the Internal Revenue Service (IRS). Get tax help from an expat tax advisor to help you understand your options.

Claiming the foreign tax credit and filing Form 1116 might be the better option if any of these apply:

• You’re paying foreign tax at a higher rate than your U.S. tax rate
• You wish to participate in an individual retirement arrangement (IRA)
• You qualify for certain family-related credits based on non-excluded income
• You wish to exclude or reduce taxes on passive or investment income

Foreign Earned Income Exclusion extensions

Even if you haven’t been out of the country long enough to claim the exclusion by your expat filing deadline, you can request an extension to file until you’ve met these time requirements.

You generally must claim the exclusion either:

• Within one year of the due date of your tax return
• By amending a timely filed return

However, you may claim the exclusion if:

• The IRS hasn’t discovered your failure to file your return claiming the exclusion, or
• You owe no tax after taking the exclusion into account

If you haven’t filed returns in prior years, you still might be able to exclude your foreign earned income from U.S. tax. This could have the effect of eliminating your tax liability and any penalties and interest that would be assessed.

Foreign Housing Exclusion and Foreign Housing Deduction

If you’re an expat and you incur foreign housing expenses, you might be able to exclude or deduct them. The Foreign Housing Exclusion is available for expats working as employees with housing expenses like rent and utilities.

The foreign housing deduction is available for self-employed expats paying foreign housing expenses. The amount of your housing exclusion or deduction is based on the difference between the following:

• Your actual foreign housing expenses
• A base amount for your foreign country of residence

You can use the Foreign Housing Exclusion if your housing costs total more than 16% of that year’s FEIE.

To calculate the maximum amount you can exclude, you’d multiply that year’s maximum income exclusion by 0.3 to get 30% of the full exclusion amount. So, for 2023, you’d take $120,000 x 0.3 = $36,000. Something to know is that most large metro areas have higher limits, so it’s important to have a Tax Advisor who knows the ins and outs of taxes in your specific area.

Common problems U.S. expats have with the foreign income exclusion and Form 2555

U.S. expats have a lot of the same questions and issues when they file their FEIE, but these are the most common problems associated with the FEIE:

• You didn’t file Form 2555 – Many expats assume that if they qualify for the FEIE it will be automatically added to their tax filing. To claim the FEIE you must file Form 2555.
• You’re a government employee — Unfortunately, U.S. government employees cannot claim this foreign income exclusion.
• You failed to calculate the FEIE correctly – If you calculate your FEIE incorrectly you won’t get the correct amount excluded.
• You claimed the FEIE when you should have claimed the FTC – For example, if you’re retired abroad and you only have investment and passive income, you may have been better off claiming the FTC.
• You didn’t track your time properly – You must be vigilant about tracking your time if you want to pass the Bona Fide Residency or Physical Presence tests. Even being off by a few hours can mess up your qualifications.
• You had no active income for that year – If you’re living abroad off investment or passive income, you don’t qualify for the FEIE.
• You didn’t pay your U.S. self-employment taxes – You still have to pay self-employment taxes when you’re claiming the FEIE.

These are only a few of the most common issues and problems we come across. If you’re having difficulties or are a new American expat, it’s smart to leave your expat taxes to a specialist.

File your Foreign Earned Income Exclusion with H&R Block

Filing taxes while living and working abroad can be overwhelming and stressful. As an expat, your tax situation is very different and requires specialized expertise. Get started with H&R Block’s Expat Tax Services today.

The post What U.S. Expats Need to Know About The Foreign Earned Income Exclusion (FEIE) appeared first on H&R Block®.

1. In general, yes — Americans must pay U.S. taxes on foreign income. The U.S. is one of only two countries in the world where taxes are based on citizenship, not place of residency. If you’re considered a U.S. citizen or U.S. permanent resident, you pay income tax regardless where the income was earned.
2. While there is no overarching tax exemption for U.S. citizens abroad, the Internal Revenue Service has created a few tools like the foreign earned income exclusion and foreign tax credit that can give you some tax relief by lowering your foreign income tax obligation.

How does it all work? Read on to learn the ins and outs of foreign income taxes. Don’t have time to catch up on all the details? Head on over to our Ways to File page and get started on your expat taxes today. Whether you file expat taxes yourself with our online DIY expat tax service designed specifically for U.S. citizens abroad or file with an advisor, H&R Block is here to help.

What foreign income is taxable in the U.S.?

If you’re a United States citizen (including Green Card holders and dual citizens) and earn income overseas, you should know that most foreign income is taxable in the U.S., including:

• Wages – Wages include any income paid to you for services or goods sold. This includes if you’re employed by a foreign company or if you’re a self-employed contractor working in a foreign country.
• Interest – Interest includes money earned from a foreign bank account or a CD, for example.
• Dividends – Dividends include payouts on foreign-owned stock.
• Rental Income – Let’s say you bought a house in the Bahamas for a steal, and you turn it into a rental property. You need to pay taxes on that rental income.

If you can count any of those sources as a means of income, you likely have a tax liability to the U.S.

How do I report foreign income for my U.S. taxes?

You now know you have a tax liability to the U.S., but how do you report it in your yearly U.S. tax filing? What if you’re a contractor — how do you report foreign income without a W-2?

If you earned foreign income abroad, you report it to the U.S. on IRS Form 1040. In addition, you may also have to file a few other international tax forms relating to foreign earnings, like your FBAR (FinCEN Form 114) and FATCA Form 8938.

If you earned money while working as a freelancer or contractor overseas, you’re considered self-employed and still pay taxes. In addition, you may also have to pay self-employment taxes.

Foreign income tax isn’t cut-and-dry. Because of all the stipulations, schedules, and requirements, it’s always in your best interest to let a trusted foreign income tax expert handle your taxes, like the Tax Advisors at H&R Block Expat Tax Services. Incorrect reporting can lead to large penalties, while having someone who knows the ins and outs of all the forms can help you save money on taxes.

How the Foreign Tax Credit and Foreign Earned Income Exclusion can reduce your foreign income tax obligations

A question we commonly get is, “how much foreign income is tax-free?” No foreign income is tax-free, but there are mechanisms in place to help prevent you from paying too much or paying taxes twice on the same income — the Foreign Earned Income Exclusion (FEIE), and the Foreign Tax Credit (FTC). They both work to reduce your U.S. taxes on foreign income, one by excluding the income earned overseas from your taxes and one by giving you a dollar-for-dollar credit on taxes you’ve already paid to your host country.

If you want to take advantage of the Foreign Income Exclusion or Tax Credit, you need to choose between claiming the FEIE and the FTC wisely. Not doing so can lead to unpleasant surprises in future tax filings.

How do I claim the Foreign Tax Credit?

The Foreign Tax Credit works like this: Say you are working in a country that has a vague tax treaty with the U.S. As a result, you end up paying taxes directly to that country. With the Foreign Tax Credit, you can show the U.S. how much money you paid in taxes to that foreign country and receive a credit for every dollar you owe, so you don’t have to pay taxes for that same income again on your U.S. tax filing.

If you qualify, you claim the Foreign Tax Credit by filing Form 1116.

How do I claim the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion is the most common tool expats use to avoid double taxation on income earned overseas. Even so, there’s still some confusion on how it actually works — it’s not automatic, for example. First, you must spend a certain number of days outside the U.S. per year and prove your ties to your new country. You’ll also need to file a U.S. tax return, and you can only claim the exclusion if you file IRS Form 2555 with your return — even if all of your foreign earned income is excludible.

How much is the Foreign Earned Income Exclusion for 2023?

The maximum foreign earned income exclusion amount is updated every year. For the 2024 tax year (2023 calendar year) you could exclude up to $120,000 or even more if you incurred housing costs. Learn more about that Foreign Housing Exclusion and Deduction. (Note that exclusion is adjusted annually for inflation). Married? The exclusion applies to each of you separately, so you each may qualify for the maximum amount unless only one of you works.

Something to note is that the exclusion does not apply to passive income such as interest and dividends.

If I make under the foreign earned income exclusion amount, do I need to file a tax return?

Whether working abroad or in the U.S., you must file a U.S. tax return if you meet the filing threshold which is generally equivalent to the standard deduction for your applicable filing status.

Need help with foreign income tax filing? H&R Block is ready to help, no matter where you are

Still unsure about foreign income taxes? Ready to file your U.S. taxes on foreign income? No matter how complicated your U.S. tax return is, there’s an expat tax expert ready to help. Get started with Virtual Expat Tax Preparation today!

The post Do U.S. Expats Pay Foreign Income Tax if Working Overseas? appeared first on H&R Block®.

Some Americans living overseas mistakenly think they can transfer money from their foreign retirement plans into U.S. plans, or vice versa, without owing taxes, like a qualified rollover in the U.S. They do this to try to defer taxation on the funds under the laws of either country until they withdraw the funds in retirement.

But moving money between foreign and domestic retirement plans is more complicated than that. Here are three of the most common myths about these transactions, and their realities. Have an international retirement plan and haven’t filed U.S. taxes yet? Get started now.

Myth: “As a U.S. resident, I can roll over funds from my international retirement plan into a U.S. plan, tax free.”

This is false. U.S. residents with a U.S. qualified retirement plan generally won’t owe taxes on certain distributions they receive during the year, if they transfer the distributions into another U.S. qualified plan. But transferring a foreign retirement plan to a U.S. one usually doesn’t meet the qualified plan rules, because the plan is housed in a foreign country. In that case, if you tried to transfer funds from a nonqualified foreign plan into any U.S.-based qualified plan, the transfer is still taxable even if all other requirements are satisfied.

Fact: Foreign retirement plan distributions are taxed under the general rule

If the distribution is taxable in the U.S., then the taxable portion is calculated under the “general rule” for retirement annuity distributions. The taxable amount is the gross distribution minus the allocable share of its cost (after-tax investment in the contract).

If both countries tax the attempted transfer, then you may be able to qualify for the foreign tax credit. The foreign tax credit is a nonrefundable credit with a carryover provision. It’s intended to relieve double taxation by the U.S. and a foreign country. Usually, U.S. citizens and resident aliens can take the credit for the foreign income taxes they paid on the income they earned in the U.S. Foreign retirement plans, except for foreign social security and certain foreign pension plans, are also reportable under the Report of Foreign Bank and Financial Accounts (FBAR), Form 8938, and Form 1040, Schedule B, Part III.

Myth: “My new country has a tax treaty with the U.S., so my foreign retirement plan transfer isn’t taxable in the U.S.”

It depends on where you’re now living. The U.S. signs tax treaties with foreign countries to define how the countries will treat tax issues between the nations. A few of these income tax treaties— including Canada, the UK, Germany, Belgium, and the Netherlands — include provisions on pensions. That’s why it’s a good idea for Americans abroad to examine their country of residence’s specific tax treaty to determine the tax on retirement plans.

Fact: Foreign retirement plans are not treated the same as qualified U.S. retirement plans

If you have a foreign pension, it will most likely not qualify for the same retirement vehicle tax benefits as a U.S.-based 401(k) or IRA. Your contributions aren’t typically tax-deductible on your U.S. income taxes, and you may actually be taxed on the plan’s annual growth regardless if you’re taking distributions or not. Additionally, employer contributions for foreign pension plans may also be considered taxable in contribution years.

Myth: “I closed out my U.S. retirement account and transferred the funds to a foreign retirement account. I can exclude this transfer on my U.S. return.”

This usually isn’t true. When you move overseas and transfer your U.S. retirement plan balances into foreign retirement plans, these rollovers generally don’t qualify for exclusion from tax unless a tax treaty provides otherwise.

How to report international retirement plans on your U.S. taxes

If you’ve got an international retirement plan, you’ll likely have some reporting to do. You may need to file:

• FinCEN 114 (FBAR) if you held over $10,000 in foreign accounts, including your foreign pension plan, at any time of the year
• FATCA Form 8938 if your combined foreign accounts and assets are worth over a certain value
• Form 8621 if the investment assets within your retirement account qualifies it as a PFIC
• Form 3520 and possibly Form 3520-A if your retirement account is considered to be a private retirement account, opened separately from your employer-based retirement account

Or, you can simply let the experts at H&R Block figure out your reporting requirements for you, so you can rest easy that your taxes are done right. Start your expat taxes now.

The post Debunked: Three myths about international retirement plans appeared first on H&R Block®.

Can a U.S. citizen living abroad have an IRA?

Yes, a U.S. citizen living abroad can have both a traditional and/or Roth IRA. The restrictions only come with making contributions—so, if you had an existing IRA before you moved abroad, you don’t have to get rid of it or transfer assets, but you may not be able to add to it while you’re overseas.

If you’re unfamiliar with IRAs, you should understand the difference between the two types:

• Traditional IRA: Traditional IRAs are tax-deductible depending on your income, filing status, and whether or not you have an employer-sponsored 401k, pension, or receive social security benefits. You can open one or contribute to one if you (or, if you file a joint return, your spouse) received taxable income during the year and are under the age of 70½.
• Roth IRA: Roth IRA contributions are never tax deductible, and you must meet certain income requirements in order to make contributions. Roth IRAs are also tax-free upon a qualified distribution.

IRA contribution rules for overseas Americans

For 2023, traditional and Roth IRA rules state Americans may contribute up to $6,500 per year or $7,500 for Americans over the age of 50. The IRA distribution rules for U.S. citizens living abroad are the same as they are for citizens living stateside. Whether or not you can contribute to your regular or Roth IRA while living abroad depends on your foreign income and the exclusions and deductions you claim—namely, the foreign earned income exclusion (FEIE) or foreign housing exclusion.

In order to contribute to an IRA while living abroad, you need to have income leftover after deductions and exclusions. If you exclude all of your income with the FEIE and have no other sources of earned income, you are not eligible to contribute to an IRA. However, if you only exclude part of your income or claim the foreign tax credit (FTC) instead, you may still be able to contribute to an IRA.

For example, let’s say a U.S. citizen employed in Australia makes $95,000 and uses the FEIE to exclude all of it on her U.S. taxes. Because she has no income leftover after the exclusion, she is not able to contribute to an IRA while working abroad. If, however, she had used the Foreign Tax Credit instead of the FEIE, she would have unexcluded income on her U.S. tax filing and would be able to contribute to her IRA.

Now, let’s say she earns $150,000, and uses the FEIE to exclude the maximum amount for 2020 of $107,600. Because she has income leftover after the FEIE, she would be allowed to contribute to an IRA.

Because each situation is different and there is a wide range of compliance rules, complex tax laws, and stipulations depending on the country in which you live, it’s crucial to get the help of an expert Tax Advisor that can guide you towards the best decision. Get started by creating your online tax portal and uploading your documents.

Roth IRAs vs Traditional IRAs for U.S. citizens living abroad

With traditional IRAs, you are allowed to contribute up to a certain amount and in return you get a tax deduction directly correlated to the amount you contribute. Money in these traditional retirement accounts are tax-deferred, meaning you don’t have to pay taxes on them until you begin withdrawals.

Roth IRAs are similar to traditional IRAs, with some exceptions:

• When you open the account, you must designate it as a Roth IRA.
• Roth IRA earnings are (in general) tax-free instead of tax deferred.
• You can withdraw Roth IRA contributions at any time without tax or penalty.
• You can continue to make contributions after you reach age 70½. However, you must still receive taxable compensation.
• You don’t have to begin taking withdrawals from your account at age 70½.

There are income limitations on Roth IRAs—each person is able to contribute up to the maximum amount if you have under $146,000 in income for 2024. If you make between $146,000 – $161,000 you’re allowed to contribute a phased-out amount, and if you make over $161,000, you’re unable to contribute.

How to start an IRA while living abroad

If you already live abroad and are looking to start an IRA, we recommend you choose a U.S.-based IRA over a foreign IRA. Foreign investments are taxed differently than U.S.-based ones, and also come with a hefty amount of reporting requirements.

Speak to an Expat Tax Advisor before contributing to make sure you’re making the right choice.

Can I move my IRA overseas?

A question we get a lot from seasoned expats is if they can move their existing U.S.-based IRA overseas. If you want to roll over an existing IRA to a foreign pension, you may have an uphill battle—rollovers can typically only occur between domestic plans. Other options you may want to look into are withdrawing your funds in your current U.S. IRA and opening a brand new one overseas or leaving the funds in your existing account.

Because of the significant impact withdrawals can have on your overall financial health, we recommend speaking with an expert before withdrawing funds.

Need help with overseas IRA reporting and IRAs for expats? Leave it to the trusted experts at H&R Block

Have more questions about contributions to an IRA for U.S. citizens living abroad? Ready to file? No matter how complicated your U.S. tax return is, there’s an expat tax expert ready to help. Get started with Virtual Expat Tax Preparation from H&R Block, the tax pros trusted by U.S. expats in every corner of the globe.

The post What are the rules on IRAs for U.S. citizens living abroad? appeared first on H&R Block®.

Don’t worry, though — we’re here to help you sort out your foreign property reporting requirements (both rental and otherwise) so you can get back to enjoying it. Ready to get started with this year’s reporting? No matter where in the world you are, we’ve got a tax solution for you. Get started with our made-for-expats online expat tax services today!

Buying property overseas? Learn the tax implications first.

Before you jump into the deep end of homeownership (or land ownership) in a foreign country, you should get to know your foreign property tax reporting requirements. Yes, you must report foreign properties to the Internal Revenue Service (IRS) on your U.S. tax return just like you would report any owned United States property.

To do that, you first need to know what type of foreign ownership you have because it affects what tax forms you must file. Many countries have rules on who can and can’t buy land or homes, and foreign buyers are frequently in the “can’t” group. That doesn’t mean you should ditch your dreams of having the top-listed Airbnb rental, though — some countries allow international buyers to own such properties through specific entities like corporations or trusts.

For example, in Mexico, foreigners may not own property in certain regions. To get around it, many foreigners set up what’s known as a Fideicomiso, which functions as a land trust and allows them to hold Mexican real estate.

If you set up an entity to own the property (like a corporation or trust), you may have more yearly reporting requirements depending what type of entity owns the property. These include Form 5471, FATCA Form 8938, Form 3520, and possibly Form 926. When you file with an H&R Block Expat Tax Advisor, they can walk you through other exceptions and tax implications from the different types of entities.

If you own the property outright, congratulations — you likely have fewer reporting requirements than if it was set up as a trust or foreign corporation. In that case, you would not have to report the property on Form 8938 or the other forms if owned individually.

If you inherited the property, check what type of ownership you have. You’ll have the same reporting requirements as if you bought it, and you’ll have to file Form 3520 if the inherited foreign property is worth more than $100,000 and the decedent was not a United States citizen or resident.

How to report overseas rental income to the IRS

If you rent out a foreign property you’re taxed on that rental income. To report income gains and losses, you first need to convert all currency to USD. Then you need to know how many days you either rented out your property or lived in it to figure out the tax treatment.

While most taxation and reporting of foreign rental income is the same as it is with a U.S. rental property, there are some exceptions. If you are using a foreign property for rental income, you will be able to deduct the following on your U.S. tax return:

• Advertising
• Auto and travel
• Cleaning and maintenance
• Commissions
• Insurance
• Legal and other professional fees
• Mortgage interest paid to banks and other financial institutions — they must be secured by the rental property
• Repairs
• Real property taxes
• Utilities
• Depreciation expense
• Other expenses specific to your rental — Ex: condo fees or landscaping expenses

What to do in the case of foreign rental property depreciation

“I have a non-U.S. rental property that operates at a loss. Do I still need to report it?”

Yes. Reporting foreign rental income is required even if it operates at a loss. One difference between domestic and foreign rental properties is the depreciation. Your overseas property is depreciated over a 30-year or 40-year period, depending on when it was first rented, instead of the 27.5 years for domestic residential properties.

Don’t worry! An Expat Tax Advisor can help you determine how to best report your foreign rental property depreciation.

Need to report foreign rental property income? H&R Block can help.

Have more questions about international real estate and reporting foreign rental income? Ready to file? We’ve got a tax solution for you — whether you want to be in the driver’s seat with our DIY online expat tax service designed for U.S. citizens abroad or want to let one of our experienced tax advisors take the wheel. Head on over to our Ways to File page to choose your journey and get started.

The post Foreign Real Estate: How to Report Foreign Rental Property to the IRS appeared first on H&R Block®.

Before you make any moves, you should get familiar with how international retirement plans are taxed, and what options you have for your 401(k) when you no longer live in the U.S.

What to do with your 401(k) when moving abroad

What should you do with your 401(k) when moving abroad? Taxes when retiring abroad are complicated, so there’s never one solid answer. Each expat 401(k) transfer situation is different and what you should do depends on where you’re living, your current finances, plans for retirement, and where you are along your retirement journey.

For example, if you’ve moved abroad for good and are ready to give up your U.S. citizenship, it may be in your best interest to transfer your plan to your forever country. If you’ve got a couple decades before retirement and you know you want to remain a U.S. citizen for life, it may make much more sense (and cost you less) to just keep your U.S. 401(k).

U.S. tax treatment of a qualified 401(k) vs. international funds

Before you make your choice, you should understand the differences in how both Stateside 401(k)s and international retirement funds are taxed.

The U.S. offers special tax treatment on what they classify as “qualified” retirement plans. The “qualified” means it meets certain requirements in the Internal Revenue Code Section 401(a). A few examples you may be familiar with are:

1. 401(k) plans
2. Profit-sharing plans
3. 403(b) plans
4. Money purchase plans
5. Defined benefit plans
6. Employee stock ownership (ESOP) plans
7. Salary Reduction Simplified Employee Pension (SARSEP)
8. Simplified Employee Pension (SEP)
9. Savings Incentive Match Plan for Employees (SIMPLE)

Most foreign retirement plans and foreign pensions are not considered qualified plans, and may even be classified as PFICs, or passive foreign investment companies (which triggers a whole host of other reporting requirements).

If you do choose to transfer funds from a U.S. Qualified Plan to a foreign retirement plan, it will be neither be tax free nor will it count as a qualified rollover. This means moving your 401(k) to an international fund will result in U.S. tax liability and possibly the 10% penalty for an early withdrawal.

In addition, whatever contributions you make to your international retirement plan likely won’t be tax-deductible, and you may have to pay U.S. taxes on the plan’s yearly gains.

There is some good news—the U.S. maintains tax treaties with other countries outlining special tax treatment of some pensions and retirement plans. So, if you have a foreign pension in the U.K., Canada, Germany, the Netherlands, or Belgium, you’ve got a tax treaty that basically allows your foreign pension to be taxed the same as a U.S. retirement plan.

Need help with your expat 401(k) taxes? Trust H&R Block.

If you have other retirement accounts such as a traditional IRA, Roth IRA, or a foreign pension plan, an expat tax expert from H&R Block Expat Tax Services can help you understand how these accounts might be taxed on your U.S. tax return. Additionally, they can help make recommendations for what you can do in the future to reduce your U.S. tax liability.

Have more questions about your 401(k)? Ready to file? No matter where in the world you are, we’ve got a tax solution for you. Get started with our made-for-expats online expat tax services today!

The post Can I transfer my 401(k) to an international retirement plan if I move abroad? appeared first on H&R Block®.

Self-employment taxes on foreign-earned income can be confusing, but the experts at H&R Block Expat Tax Services are here to help you understand the basics.

Ready to file? Start your self-employment expat taxes now with an online advisor or with our DIY online expat tax service.

How self-employment & Social Security taxes work with foreign-earned income

First, you should understand the basics of self-employment taxes on U.S. based income. In the U.S., if you’re self-employed and your net earnings from self-employment equal $400 or more, you must do two things:

• File Schedule SE
• Pay self-employment tax (which includes Social Security taxes)

The IRS considers you to be self-employed if you own your own business or are an independent contractor. Self-employed Americans must make quarterly estimated tax payments to cover the federal income tax and self-employment tax — which includes your share of Social Security and Medicare taxes as well as the amount employers pay on the employees’ behalf.

For 2023, the U.S. self-employment tax rate is 15.3% on the first $160,200 of net income, which includes:

• 12.4% Social Security tax
• 2.9% Medicare tax

All of the above is still true if you’re self-employed and living abroad. You still have to pay that 15%, unless the foreign income you earned was in a country with a totalization agreement with the U.S.

If you’re self-employed abroad, you’ll still owe U.S. self-employment tax on foreign earned income. This is true even if you’re able to claim the foreign earned income exclusion. However, Social Security Totalization Agreements between the United States and many foreign countries may prevent you from being subject to self-employment taxes in both countries.

Get started on your U.S. self-employment taxes now.

What’s a totalization agreement?

International Social Security agreements, better known as “totalization agreements,” are similar to tax treaties, but for Social Security and Medicare taxes instead of income taxes. Totalization agreements serve two purposes:

1. Eliminate double Social Security taxation issues for Americans abroad
2. Help dictate benefit protections for expats who are living and working outside the U.S. (this includes helping those who divide their working years between countries quality for Social Security benefits in the country they retire)

Generally, if you’re self-employed abroad or earn income abroad and you pay the equivalent of Social Security and Medicare taxes to another country with a totalization agreement, then you likely won’t have to pay self-employment taxes to the U.S.

Not every country has a totalization agreement with the U.S., and if there is no totalization agreement you may have to pay self-employment taxes to both countries.

If you’ve paid self-employment or Social Security taxes to another country, you may have to get a certificate of coverage in order to prove that you’re exempt in the U.S. Normally, you’d get one from your current country of residence, but each country is different. For example, if you’re filing U.S. taxes from Australia, you have to get a certificate of coverage from the U.S.

Other considerations if you’re self-employed and working abroad

While these are not the only considerations, if you’re self-employed and working abroad you may need to know:

• U.S. employers are required to withhold U.S. Social Security from the compensation paid to their employees working in the U.S. and also from those working overseas. Due to Social Security Totalization agreements made with 25 countries, a general exception to withholding U.S. Social Security can be elected by U.S. employees whose foreign service for the U.S. employer in a participating country is anticipated to exceed 5 years.
• Foreign employers are not required to withhold U.S. Social Security unless they are an affiliate of a U.S. company and have made an election to withhold Social Security for all of their U.S. employees.
• If you are working for a foreign employer who has no requirement to withhold U.S. Social Security, you have no obligation to remit U.S. Social Security taxes on your earnings. In fact, you’re prohibited from making such voluntary contributions to the U.S. Social Security System.

Get started on your U.S. taxes now.

How to report foreign self-employment income with H&R Block

Not sure how to report foreign self-employment income? H&R Block makes it simple for expat entrepreneurs to report foreign income and file taxes abroad without a W-2. Here’s how to file your U.S. expat taxes online:

1. Head on over to our Ways to File page
2. Pick your journey — with you in control using our online DIY tool or letting a Tax Advisor guide you through the process.
3. Once you’re through your chosen journey, you review your return and pay
4. We file your return with the IRS
5. You sit back knowing your self-employment taxes were done right

Self-employed and working abroad? Conveniently file your self-employed tax return with H&R Block Online Expat Tax Services.

Feeling lost about Social Security Totalization Agreements or filing taxes as a self-employed expat working abroad? No matter how complicated your U.S. tax return is, there’s an Expat Tax Expert ready to help. Get started with Virtual Expat Tax Preparation from H&R Block Expat Tax Services now!

The post Do expats pay U.S. Social Security or self-employment tax on foreign earned income? appeared first on H&R Block®.

Most American expats understand the reporting requirements that come with U.S.-based investments such as mutual funds. However, they don’t typically know that the foreign mutual fund reporting requirements are much more intricate and come with additional costs for U.S. taxpayers.

Learn more about PFICs below with H&R Block, or get started on your expat taxes today.

What is a PFIC?

PFIC stands for Passive Foreign Investment Company. Under U.S. tax law, any pooled investment that is registered outside of the U.S. would qualify as a Passive Foreign Investment Company, including multiple types of funds, investment trusts, and certain foreign pension investments. PFICs are taxed through a much more complex system with much stricter rules than U.S. mutual funds or exchange traded funds.

How to identify a PFIC

A common question we hear is, “how do I identify a PFIC?” A key point to understand is that mutual funds from U.S. companies with international investments — like Vanguard, for example — are generally not considered PFICs. If, however, you open a foreign fund with UBS — a Swiss investment company — that fund would be considered a PFIC.

You can generally tell if a foreign corporation or foreign investment fund is considered a passive foreign investment company (PFIC) if it meets one of the following two characteristics:

1. 75% or more of its gross income for the taxable year is passive income, or
2. At least 50% of its assets are held to produce passive income.

Passive income is income that is generated passively (through investment vehicles) instead of actively (income earned in exchanged for goods and services). Passive income includes:

• Dividends, interest, royalties, rents, or annuities
• Excess gains from certain asset sales or exchanges, certain commodities transactions (including futures), and foreign currency
• Income equivalent to interest
• Income from notional principal contracts
• Payments in lieu of dividends

How are PFICs taxed?

There are three ways a PFIC can be taxed: Excess distribution, Mark-to-Market (MTM), and Qualified Electing Fund (QEF).

• §1291 Fund (excess distribution): The default taxation method is excess distribution as a §1291 Fund. If you choose this route, you’re taxed on excess distributions and would then realize gain on the sale or disposition of stockholdings.
• Mark-to-Market (MTM): With an MTM election, your PFIC’s yearly increases in value are taxed as ordinary gains. At the end of the year, the marketable stock you hold is then treated like you’d sold and repurchased it at its fair market value on that last business day. The value on the last business day of the year will determine the ordinary gains and losses of the fund. Something to note is that if you want to go this route, you need to make that election in the first year. If you don’t, your PFIC will default to being taxed as excess distribution.
• Qualified Electing Fund (QEF): With a QEF election, your PFIC is taxed on your PFIC’s pro-rata share of undistributed earnings for both ordinary income and long-term capital gain. However, this method is tough to employ due to the documentation requirements associated with making the election.

Bottom-line, investing in foreign mutual funds can sometimes be costlier than any economic benefit you might gain. If you can, we recommend you open U.S.-based funds. If you’re dead set on an international fund, it’s important to talk to an H&R Block Expat Tax Advisor to make sure you’re handling foreign investments in the best way possible. U.S. expat taxes aren’t easy to start with and having a pro by your side can make all the difference to your wallet come tax season.

What are my PFIC reporting requirements if I have shares in a foreign mutual fund?

Passive Foreign Investment Company reporting requirements and PFIC rules are complex and extremely detailed. In general, if you have shares in a foreign mutual fund, you’ll have to report it to the IRS. There are also a few reporting requirements you may have:

• Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund
• FBAR – Your Foreign Bank Account Report
• Form 8938 – FACTA reporting form

Before you jump in, seek the guidance of an expat tax expert, like our Expat Tax Advisors at H&R Block.

Invested in a foreign mutual fund? Trust your PFIC reporting to H&R Block’s Expat Tax Services

Even the best global mutual funds come with strict reporting requirements and heavy taxes, which is why we don’t recommend clients invest in international mutual funds without knowing the tax consequences up front. However, if you do have PFICs, leave the reporting to us. Our Tax Advisors are trusted by expats all over the globe, and there’s no tax situation we can’t handle with a snap.

Ready to file your PFIC reporting requirements? No matter how complicated your U.S. tax return is, there’s an Expat Tax Expert ready to help. Get started with Virtual Expat Tax Preparation today!

The post PFIC (Passive Foreign Investment Company) & Foreign Mutual Fund Reporting Requirements appeared first on H&R Block®.

The experts at H&R Block’s Expat Tax Services are here to help, so below, we’ll give you the rundown of what you should know about retirement account withdrawals for expats overseas.

As an expat, is my 401(k) or IRA taxed in the U.S. if I live abroad?

Yes. If you are an expat enjoying retirement abroad, the U.S. still imposes taxes on your retirement accounts. You can generally assume that taxes on your U.S. retirement accounts will be the same as if you lived Stateside: Traditional 401(k)s and IRAs are tax-deferred accounts, meaning you’ll pay taxes on withdrawals even if you’re overseas. Withdrawals are taxed as income. Roth IRAs are a bit different—once you’ve had the account for 5 years, you may begin withdrawals tax-free, even if you’re abroad.

Tax implications of making an IRA or 401(k) withdrawal overseas

There are two difference scenarios in which you’d make withdrawals from 401(k) or IRA as an expat:

1. Early withdrawals
2. Regular distributions once your retirement account has matured

Early 401(k) and IRA withdrawals for expats

If you choose to withdrawal funds from an IRA or 401(k) before your funds have matured (generally, before you’re 59 ½) you will pay a tax on it—regardless of if you’re living in the U.S. or outside of it.

First, the IRS may withhold income taxes on an early 401(k) withdrawal. For example, let’s say your income tax is 24%. If you withdraw $50,000 at age 45, the IRS may withhold $12,000 of it, leaving you with only $38,000.

Second, you may be penalized 10% of the withdrawn amount, subtracting another chunk of your total.

There are exceptions to the 10% penalty, including withdrawals for hardships, disabilities, and other unprecedented situations (including Covid-19 retirement account withdrawal exceptions). Because these exceptions are highly complex, we recommend you speak with a financial advisor before attempting any sort of early 401(k) or IRA withdrawal while overseas.

Regular IRA and 401(k) withdrawals for expats

After you’ve reached the age of 59 ½ you are allowed to begin taking withdrawals from your retirement accounts with no penalties. Under most circumstances, approved overseas withdrawals from a 401(k) or U.S. pensions are still taxed as income, albeit they’re treated as unearned income—meaning you won’t be able to claim them under the Foreign Earned Income Exclusion.

However, there are many tax treaties between the U.S. and other countries. The benefits in these treaties could potentially lower or even eliminate U.S. and/or foreign taxes on an expat’s IRA or 401(k) withdrawal, depending on which country you currently call home.

Some expats think transferring your U.S. 401(k) to an international retirement account is a smart choice, but it could give you more of a headache than peace of mind.

Need help with 401(k) taxes as an expat? H&R Block is here to help.

Have more questions about taxes in an expat retirement? Ready to file? Whether you file expat taxes yourself with our online DIY expat tax service designed specifically for U.S. citizens abroad or file with an advisor, H&R Block is here to help.

The post 401(k) & IRA Withdrawals Overseas appeared first on H&R Block®.

Taxes when selling real estate can be complicated even when that property is Stateside, and you probably have more than a few questions, like; “How much tax do I pay on the sale of property abroad?” “How do I report a sale of foreign property on my U.S. taxes?” “What taxes do you owe if the overseas property you sell was inherited?”

Below we’ve answered these questions and summarized the basics of what you should know about selling property abroad and U.S. taxes come tax time.

Sold an overseas property last year and ready to file? Get started on your expat taxes now.

U.S. capital gains tax on selling foreign property

When you sell property or real estate in the U.S. you need to report it and you may end up owing a capital gains tax. The same is true if sell real estate overseas, and we don’t recommend trying to avoid a capital gains tax on foreign property. The U.S. is one of only a few countries that taxes you on worldwide income — and gains made from foreign property sales are considered foreign income.

That means it doesn’t matter if the real estate you sold is in Austin, Texas or Auckland, New Zealand — you still have an obligation to report the gains you made on the sale. What’s more, if the gains are not excluded, you’ll pay a short-term or long-term capital gains tax on it.

When selling property abroad, different kinds of residences and properties have different kinds of reporting requirements and tax specifications. For example, selling an overseas rental property has different tax rules than when you sell an overseas primary residence.

A word of warning — you may also owe taxes to the country in which the overseas property lies, but you may be able to avoid paying capital gains taxes to both countries by claiming the foreign tax credit, which is a dollar-for-dollar credit on taxes paid to one of the countries. Get started with an Expat Tax Advisor now.

U.S. taxes on sales of a primary foreign residence

A foreign residence/property qualifies as your principal residence if you lived in and owned it for at least 24 out of the last 60 months ending on the date of the property sale.

The same taxes and tax benefits that apply to selling your home in the U.S. also apply to selling your primary residence in a foreign country. That means any gain from selling your primary residence overseas is usually tax-free, as long as you meet the occupancy requirements and your gain is below these thresholds:

• $500,000 – if you’re married filing jointly
• $250,000 – if you use any other filing status

If your capital gain on selling that overseas property is over the limit, the excess will be taxed at the lower long–term capital gains rate. There are some exceptions for the 24–month ownership rule for events like a work-related move, so speak to your Expat Tax Advisor if you have extenuating circumstances.

U.S. taxes on sales of inherited foreign property

All the above conditions apply to U.S. taxes on sales of inherited foreign property, but you may have an extra step. Once a decedent passes, an inherited foreign property often receives a stepped–up basis, which is the property’s fair market value on the date the original owner passed away or deeded the property to you. Once that’s converted into USD, your capital gains would be any income you made over that original amount.

Not all inherited property is treated exactly like this — it depends on the way the property’s ownership was structured.

U.S. taxes on sales of foreign rental properties

If you’re selling a foreign rental property, any gain you realize may be taxed at multiple different rates, depending on the amount of your overall gain, your holding period, and the amount of depreciation claimed on the property.

Reporting requirements and U.S. taxes on selling overseas properties get more complicated if you do not own the property outright (which is somewhat common for overseas rental properties). If this sounds like your situation, another form you may have to file is Form 5471 (if the foreign property you’re selling is held by a foreign corporation).

Get started with an Expat Tax Advisor now.

Reporting the sale of foreign property to the IRS and FinCEN

Reporting the sale of foreign property can be tricky, depending on where the property is, whether the income from the sale was deposited into a U.S. or foreign bank account, and other factors. For example, if the sale was made in a currency other than USD, you’ll have to go back and calculate the exchange rate at the time the sale was made.

Just like you would with the sale of a U.S. property, you may need to file IRS Form 8949 and a Schedule D (and a Form 4797 for rentals). If the income you made from the sale of your foreign property was deposited into a foreign bank, you may have to report it on a Foreign Bank Account Report (FBAR) by using FinCEN Form 114. You may also need to file FATCA Form 8938.

Selling foreign property? Let H&R Block help handle your U.S. taxes.

Have more questions about the tax implications of selling real estate abroad? Ready to file? No matter what your U.S. tax situation is, we’ve got a expat tax solution for you — whether you want to be in the driver’s seat with our DIY online expat tax service designed for U.S. citizens abroad or want to let one of our Expat Tax Advisors take the wheel. Head on over to our Ways to File page to choose your journey and get started.

The post U.S. Capital Gains Tax on Selling Property Abroad appeared first on H&R Block®.