Returning to the US: Essential checklist for expats 2024

Returning to the US after living abroad can be an exciting yet complex process, especially when it comes to navigating the tax implications of a mid-year move. If you’re an expat, you must understand your tax obligations and take proactive steps to make it a smooth transition.

Many factors come into play, such as determining your residency status, understanding filing requirements, and managing your foreign assets and income. Additionally, you'll need to consider state tax implications, healthcare coverage, and potential changes to your employment and financial situation.

In this article, we'll provide an essential checklist for expats returning to the US, covering key topics such as residency status, filing requirements, and financial considerations.

Whether you're returning for personal or professional reasons, this comprehensive guide will help you navigate the process with confidence and minimize potential tax liabilities.

1. Confirm and update your residency status with the IRS

One of the first steps when returning to the US is to determine your residency status for tax purposes. The IRS determines your status through either the Green Card Test or the Substantial Presence Test. If you meet the criteria for either test, you'll be considered a US resident for tax purposes and subject to US tax laws.

For those returning mid-year, it's important to understand that you may still qualify for the Foreign Earned Income Exclusion (FEIE) for the portion of the year spent abroad.

As of 2024, the FEIE allows you to exclude up to $126,500 of foreign-earned income, prorated based on your time abroad. Keep in mind that the FEIE is only available for foreign-earned income and cannot be used to exclude US-sourced income.

Pro tip: To be eligible for the FEIE, you must pass either the Bona Fide Residence Test or the Physical Presence Test.

2. Don't forget about state residency

In addition to federal tax obligations, it's crucial to consider state residency when returning to the US. Each state has its own rules for determining residency, which can significantly impact your tax filings and deductions.

Many states have unique regulations for returning residents, particularly regarding the taxation of foreign income.

During the year of repatriation to the US, you will likely be required to file a Non-Resident or Part-Year Resident State Tax Return for the state you move to. Prior to your return, research what types of foreign income are taxable at the state level and plan accordingly.

Generally, pension income is taxable in the state where you reside, while capital gains are taxed by the locality where the gains arose. This means you may not need to rush to liquidate foreign securities, as capital gains will likely only be taxed at the federal level.

3. Familiarize yourself with filing requirements and deadlines

Expats returning to the US mid-year should be aware of the key deadlines for filing their tax returns:

• April 15 – the standard filing deadline for those residing in the US
• June 15 – automatic extension for those living abroad on April 15
• October 15 – additional extension available by filing Form 4868

It's important to note that while extensions may grant additional time to file, any tax due must be paid by April 15 to avoid interest and penalties. Failure to pay taxes owed by the deadline can result in significant financial consequences.

In addition to the standard Form 1040, returning expats may need to file additional forms such as:

• Form 2555: [Foreign Earned Income Exclusion]
• Form 1116: [Foreign Tax Credit]
• FinCEN Form 114: [Foreign Bank Account Report]

These forms can be complex, so it's essential to consult with a tax professional to ensure you're meeting all necessary filing requirements and minimizing your tax liability.

4. Report all worldwide income

US citizens or residents are required to report all worldwide income to the IRS, no matter where it was earned. This includes income from foreign sources starting from the date you return to the US.

It's essential to keep accurate records, you should track and report:

• foreign-earned income eligible for the Foreign Earned Income Exclusion (FEIE)
• investment earnings, including interest, dividends, and capital gains
• rental income from properties owned abroad
• business profits from foreign ventures
• pension distributions from foreign retirement plans
• interest earned on foreign bank accounts

Gathering all necessary documentation, such as foreign tax returns, bank statements, and investment records, is essential to accurately report your worldwide income on your US tax return.

Failure to report foreign income can result in significant penalties, interest charges, and potential legal consequences.

To ensure compliance and minimize your tax liability, consider working with a tax professional experienced in handling expat tax matters.

5. Evaluate Social Security and retirement plan options

When returning to the US, carefully assess your Social Security and retirement plan options to avoid pitfalls. If you've been contributing to a foreign pension while living abroad, determine the best way to handle these funds to avoid double taxation and remain compliant with IRS rules.

Consider these:

• federal and state taxation of foreign pensions
• totalization agreements between the US and your former country of residence, which may impact your tax obligations and benefits eligibility
• rollover options to transfer funds from your foreign pension to US-based retirement accounts, such as 401k/IRAs
• Social Security credits earned abroad and their impact on your future benefits

Research your options and consult a financial professional to develop a strategy that minimizes your tax liability and maximizes your retirement savings. Visit our retirement planning guide for expats, which covers these topics in greater detail and provides valuable insights tailored to your unique situation.

6. Get health insurance or enroll in Medicare

Under the Affordable Care Act (ACA), most individuals must have minimum essential coverage when returning to the US. This can be easy to overlook if you return to the US from the UK for example, where healthcare is free.

You'll need to obtain health insurance through:

• Employer-sponsored plans
• Private insurance
• Healthcare Insurance Marketplace (ACA exchanges)
• Medicare, if eligible

NOTE! You have a three-month grace period to secure coverage after repatriation to the US. Over 65s may need to enroll in Medicare, and enrollment deadlines apply.

The exemption for taxpayers meeting the Physical Presence Test or Bona Fide Residence Test remains in force for the months spent abroad. However, upon returning, you must secure US health coverage for you and your dependents to avoid an ACA penalty.

7. Manage foreign financial accounts and currency exchange

You must properly manage your foreign financial accounts and assets when returning to the US. If you have foreign accounts exceeding $10,000 in aggregate value, you must file a Foreign Bank Account Report (FBAR) using FinCEN Form 114, regardless of your residency.

You may also need to file Form 8938 (FATCA) if your foreign assets meet these thresholds:

• Single filers: $50,000 at year-end or $100,000 any time during the year
• Joint filers: $100,000 at year-end or $200,000 any time during the year

Foreign pension accounts from your previous country must be reported on the FBAR, even if dormant. Failure to report can result in significant penalties, so consult a tax professional for compliance.

8. Review employment changes and deferred compensation

A return to the US generally coincides with changes in employment and compensation structures. If you're starting a new job upon repatriation, it's essential to carefully review your employment contract and analyze the following key aspects:

• tax equalization agreements, which may impact your overall tax liability
• deferred compensation arrangements, including the timing of payments and associated tax implications
• stock option grants, vesting schedules, and their potential tax consequences
• bonus structures, including performance metrics and payout dates

To fully understand how these factors will influence your US tax obligations and to develop a tax-efficient strategy for your transition, we recommend you work closely with both your employer and a knowledgeable tax professional.

9. Plan for foreign property and asset management

If you own property or assets, for example, in London, consider the tax implications of retaining or selling when you return to the US from the UK. Keeping or disposing of your property can have a significant impact on your US tax obligations.

To remain compliant, thoroughly document all foreign property transactions, including:

• purchase and sale prices
• costs of any improvements or renovations made to the property
• exchange rates at the time of purchase and sale
• related expenses, such as commissions, legal fees, and property management costs

Proper documentation will be essential for accurately calculating and reporting any gains or losses. Make a habit of keeping meticulous records to ensure you're meeting all reporting requirements and minimizing your tax liability.

For more detailed guidance on managing foreign property and assets when returning to the US, visit our foreign property guide, which covers key considerations, tax implications, and strategies for effectively managing your foreign holdings during the repatriation process.

10. Claim moving expense deductions if eligible

The Tax Cuts and Jobs Act of 2017 eliminated the deduction for general moving expenses. However, active-duty military members can still claim qualified expenses when returning to the US due to a permanent change of station.

If you qualify, you can deduct reasonable expenses related to moving your household goods and personal effects, as well as travel costs (including lodging but not meals) for yourself and your family members.

Be sure to keep accurate records and consult with a tax professional to ensure you're claiming all eligible deductions.

Also - see the guidelines on moving expenses for more information.

11. Update legal documentation and immigration status

Upon your return, it's crucial to update any legal documents and ensure the proper immigration status for yourself and any family members who are foreign nationals.

This may include:

• driver's licenses
• professional certifications
• insurance policies
• estate planning documents

Failing to update these documents can lead to legal complications and potential tax issues.
If you have family members who are not US citizens, ensure they have the appropriate visas or green cards to maintain legal status in the US.

Pro tip: Before returning, consult with an immigration attorney to develop a plan for updating legal documents and ensuring compliance with immigration requirements.

12. Coordinate with your employer on exit paperwork

Are you returning from an overseas assignment with your employer? Take the time to sort all necessary exit paperwork with your company's HR department. This may include:

• tax equalization settlements
• gross-up calculations for tax payments made on your behalf
• foreign pension arrangements and transfers
• health insurance and other benefit transitions

Doing this paperwork in advance makes for a smoother transition and avoids any gaps in coverage or unexpected tax liabilities.

NB! Some employers may not be familiar with the unique tax and benefit considerations for repatriating employees. Be proactive and seek guidance from experienced tax professionals where necessary.

13. Use streamlined filing to catch up on expat taxes

If you've fallen behind on your US tax filings while living abroad, the IRS offers a streamlined filing compliance procedure to help you catch up. This program allows eligible taxpayers to come into compliance with reduced penalties and without the risk of criminal prosecution.
The program can help you get up to date on:

• past due tax returns (up to three years)
• FBAR filings (up to six years)
• other required information returns and foreign account reporting

To qualify for streamlined filing, you must certify that your failure to file was due to non-willful conduct.

14. Assess the tax implications of a mid-year return

Returning to the US mid-year may bring its own tax implications. You should consider:

• FEIE eligibility based on time abroad
• FTC carryover (up to 10 years)
• state tax residency and foreign income taxation
• healthcare coverage requirements and penalties

FTC carryovers can offset future foreign tax liabilities but not US-sourced income. Unused FTCs expire after 10 years.

NOTE! Timing, residency status, and income sources all impact tax obligations. For example, if you return to the US late in the year and have substantial foreign income, you may still qualify for the FEIE or FTC, reducing your US tax liability.

15. Seek professional guidance

Don't sweat the complex tax situations when returning to the US. An experienced expat tax professional can help you to:

• Determine residency status/tax obligations.
• Identify deductions, credits, and exclusions.
• Ensure proper reporting of foreign income/assets.
• Develop a tax-efficient strategy for your unique situation.
• Represent you before the IRS if needed.

To save you time, money and headaches, book a free consultation with us and find out how we can make your repatriation process as smooth as possible.

Conclusion

In summary, returning to the US from abroad is a complex process from a tax perspective.

But by understanding your obligations, taking proactive steps to address key issues, and seeking professional guidance, you can minimize potential tax liabilities and ensure a smooth transition to this exciting new chapter in your life.