As an American retiree living full-time in Europe, navigating U.S. tax filing requirements can seem overwhelming, but it is essential to stay compliant with IRS regulations. In many ways filing taxes is easier when living abroad as we tend to simplify our lives in foreign lands. There are also several tax advantages offered to those retiring abroad. Below is an overview of the key considerations and forms required to file taxes when living abroad. Please keep in mind these things are subject to change, and we always recommend seeing a tax professional. Do not rely solely on the information provided here.

Do Americans Living Abroad Need to File Taxes?

Yes, U.S. citizens and resident aliens are required to file a tax return with the IRS each year, regardless of where they live. The United States follows a system of citizenship-based taxation, meaning that American citizens must report their worldwide income, even if they are residing abroad.

Filing Requirements and Income Reporting

Even if you live abroad, you are still subject to the same income thresholds as U.S.-based citizens. For the 2023 tax year, the income filing thresholds vary based on your filing status (single, married filing jointly, etc.), but generally, if you are under 65 and have income over $12,950 (single filers), you are required to file a return. For those 65 or older, the threshold is slightly higher.

Social Security Income and Taxes

In most cases, American retirees living abroad do not pay U.S. taxes on Social Security income. However, the tax treatment of Social Security benefits may depend on whether the U.S. has a tax treaty with the European country where you are living. For example, under treaties with certain countries, Social Security benefits may be exempt from U.S. taxation or taxed at a reduced rate. Always check the tax treaty specifics for the country where you reside.

Taxes on Pensions, 401(k), and IRA Distributions

The tax treatment of pension income, 401(k) withdrawals, and IRA distributions varies. In general:

Distributions from a 401(k) or IRA are taxable by the U.S. government, regardless of where you live.

Pension income may be subject to U.S. taxes but could also be subject to taxation in your country of residence, depending on the terms of a bilateral tax treaty.

You may also be able to claim foreign tax credits if you are taxed on these distributions by your country of residence, which helps avoid double taxation.

Form 1040: The Main U.S. Tax Form

Even if you are living abroad, you will typically file Form 1040, the standard U.S. individual income tax return. In addition, several other forms may be required depending on your specific situation.

Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit

If you have income from a job abroad, you may be able to take advantage of the Foreign Earned Income Exclusion (FEIE) or claim the Foreign Tax Credit.

Foreign Earned Income Exclusion (Form 2555): The FEIE allows you to exclude a certain amount of foreign-earned income from U.S. taxes. For the 2023 tax year, this exclusion is up to $120,000 of earned income. This does not apply to pensions, Social Security, or other retirement distributions.

Foreign Tax Credit (Form 1116): If you are paying taxes to the country in which you reside, you may be eligible to claim a foreign tax credit to reduce your U.S. tax liability.

Qualifying for Non-Resident Status (Physical Presence Test)

To qualify for the Foreign Earned Income Exclusion, you must meet one of two tests:

Bona Fide Residence Test: You must have established bona fide residence in a foreign country for an entire tax year.

Physical Presence Test: You must be physically present in a foreign country or countries for at least 330 full days during a 12-month period.

FinCEN Form 114: FBAR

If you hold more than $10,000 in foreign financial accounts (total) at any time during the year, you are required to file the Report of Foreign Bank and Financial Accounts (FBAR), which is also known as FinCEN Form 114. This form is filed separately from your tax return and is due on April 15 each year (with an automatic extension to October 15).

Additional Considerations

Totalization Agreements: If you are receiving Social Security or other similar benefits from your host country, the U.S. has agreements in place with many countries to ensure that you are not double-taxed on Social Security benefits.
Estate and Gift Taxes: If you have assets in the U.S. or abroad, you are still subject to U.S. estate and gift tax laws, and these should be factored into your planning.

Conclusion

As a U.S. citizen living abroad, it is essential to stay informed about your tax obligations, including filing Form 1040, claiming the Foreign Earned Income Exclusion or Foreign Tax Credit, and reporting foreign bank accounts with FBAR. Always consult with a tax professional who specializes in expatriate tax law to ensure full compliance and take advantage of any available exclusions or credits.