Living in Paris, the City of Love or Light, is the adventure of a lifetime, whether it was romance, work ,or just a desire to know it that brought you there.
American expats though find themselves in the unenviable position of having to file US taxes despite living abroad.
This is because the US is unique among developed nations in taxing based on citizenship rather than on residency. This in turn means that all Americans have to file US taxes, wherever they live or earn.
It’s not a very intuitively obvious concept, and many Americans living overseas aren’t aware that they still have to file US taxes. Fear not however, and read on to discover everything you need to know about filing US taxes as an American expatriate living in Paris - including how to catch up with you filing without facing penalties if you need to.
1 - Know your US filing dates
All Americans who earn over around $10,000 (or just $400 of self-employment income) are required to file a US tax return, wherever in the world they live or earn. While any taxes due are still due by April 15th, expats have until June 15th to file their US tax return, with a further extension available until October 15th upon request.
Along with form 1040, further forms may need to be filed to claim some of the exemptions that can reduce or eliminate US tax liability, and some expats may also have to report their foreign assets.
Separately, expats who have to report their foreign bank accounts by filing an FBAR (Foreign Bank Account Report) to FinCEN should do so before April 15th, though again an extension is available until October 15th.
2 - Consider claiming the Foreign Earned Income Exclusion
Some good news at last: the Foreign Earned Income Exclusion lets Americans living abroad exclude the first around $100,000 (the exact figure rises a little each year) of their income from US tax. However, the Foreign Earned Income Exclusion isn’t applied automatically: if you want to claim it, you still have to file a tax return, and attach form 2555.
You also have to prove that you live abroad by meeting one of two tests.
The Bona Fide Residence Test requires you to prove that you are a permanent resident in a foreign country. So, if you have settled in Paris, you’ll probably have a property rental agreement and/or utility bills, or a work visa, or an employment contract, or other ways of proving your permanent residency.
Alternatively, the Physical Presence Test requires you to prove that you spent at least 330 days abroad in a 365 day period that overlaps with the tax year. Note though that you can only claim the Foreign Earned Income Exclusion for the days you spent abroad that overlap with the tax year.
If you can meet the requirements of one of these two tests, you can claim the Foreign Earned Income Exclusion by filing form 2555 with your US tax return.
3 - Consider claiming the Foreign Housing Exclusion
If you are claiming the Foreign Earned Income Exclusion, you rent your home in Paris, and you earn over around $100,000, you can also claim the Foreign Housing Exclusion (or the Foreign Housing Deduction, if you’re self-employed).
The Foreign Housing Exclusion allows you to exclude a proportion of your home rental expenses from US tax. The IRS publishes strict guidelines as to which expenses are deductible, and also what the maximum value of your expenses you can exclude, which depends on where you live. The total for expats living in Paris is $33,792 for 2016. The figure normally rises a little each year. .
4 - Consider claiming the Foreign Tax Credit
The Foreign Tax Credit gives Americans who pay tax in another country a $1 US tax credit for every dollar of tax that they’ve paid abroad.
It’s a good option for anyone who’s paying more tax in France than they would owe to the US, as in this scenario they can claim a greater value of US tax credits than the US tax that they owe, and then carry the excess credits forward for future use. In this scenario, the Foreign Tax Credit would be claimed instead of the Foreign Earned Income Exclusion.
Similarly to the Foreign Earned Income Exclusion, the Foreign Tax Credit isn’t applied automatically and needs to be claimed by filing form 1116 alongside a federal return.
The Foreign Tax Credit can also be claimed as well as the Foreign Earned Income Exclusion by expats who are earning over around $100,000, but only on the income over this amount.
5 - Check whether you should file an FBAR
Expats who have foreign bank or investment accounts may also have to file a Foreign Bank Account Report, or FBAR.
If you have foreign bank or investment accounts or pension, mutual or insurance policies that have a combined, total cash value of over $10,000 at any time during the tax year, you are required to file an FBAR to report them.
In practice, an FBAR is FinCEN form 114. The fact that they are filed to FinCEN rather than the IRS means that the penalties for incorrect filing or not filing are steeper, starting at $10,000 a year if the offense is considered to have been non-willful (unintentional).
Worse news, around 200,000 foreign financial institutions including banks are reporting their American account holders (including account balances) to the US government, so the IRS knows if you should be filing an FBAR.
As such, if you have savings or investments abroad, be sure to check whether you should be filing an FBAR.
FBARs should be filed online by April 15th, though an extension is available until October 15th.
6 - Check whether you have filing requirements under FATCA
FATCA is an acronym for the Foreign Account Tax Compliance Act, a law passed in 2010 to crack down on tax avoidance.
It imposed a tax on companies trading in US financial markets who don’t report their US account holders to the US (so persuading almost every foreign bank and investment firm to do so), while it also requires Americans to report their foreign assets if they meet certain minimum values.
For Americans living abroad, the minimum value of foreign assets that have to be reported is $200,000 per person. Qualifying assets exclude physical assets though, such as property and cars. As such, normally only expats with investment (or pension, or life insurance) portfolios worth over this amount need to report them under FATCA.
If you need to report your foreign assets, you should report them on form 8938, which should be filed along with your tax return#.
7 - If your spouse isn’t American, consider filing separately
If your spouse is French, and neither a US citizen nor green card holder, and they have (or may have in the future) assets or income that would be subject to US taxes, consider checking ‘married filing separately’ on your tax return to keep them and their finances outside Uncle Sam’s reach.
If they aren’t working however, and probably won’t work again in the future, you may want to file jointly, as then you can apply both your and their deductions to just your income. Once they are within the US tax system though, they will need to register for a social security number and a personal tax identification number.
8 - If you’re behind on your filing, consider the Streamlined Procedure
If you have just realized that you should have been filing a US tax return (and/or FBARs) from Paris but haven’t been, there’s an IRS amnesty program that allows you to catch up without facing any penalties. It’s called the Streamlined Procedure, and to qualify you have to file your last 3 tax returns (if applicable) and your last 6 FBARs (again, if applicable), pay any taxes that you owe (often none, if you claim one or more of exclusions mentioned above), and self-certify that your previous not filing was non-willful.
The Streamlined Procedure is a great option for Americans living in Paris who weren’t previously aware that they had to file. Don’t delay though, as if the IRS comes to you first, perhaps based on information provided by French banks (or tax information provided by the French government), you may no longer have the option.
9 - Don’t forget about French taxes
Residents in France pay French income taxes on their worldwide income. You’re considered a French resident if you have your main home in France, if France is the center of your economic activity (for example if you are employed by or own a French firm), or if you spend at least 183 days in the tax year in France.
French taxes are due by May 18th if you file a paper return, or, if you file online, the dates are later and vary depending on which department you live in.
French taxes are relatively high, so many US expats working in France might consider claiming the Foreign Tax Credit if their French tax liability is greater than their US one.
Non-residents are only taxed on their income sourced in France.
10 - If in doubt…
Filing taxes as an American living abroad is typically more complex than filing from the States, so if you have any doubts or queries about your US tax situation, we strongly recommend that you contact a US expat tax specialist for some advice.
This article has been curated with an amazing help from our friends over at Bright!Tax.
Bright!Tax is a leading provider of expat tax services to Americans living abroad. We have helped hundreds of Americans living in Paris to file their US taxes, in their best interests, and with the minimum of hassle. If you have any questions about filing US taxes from France, don’t hesitate to contact us, and we’ll be happy to help.