The estimated tax rules apply to all U.S. citizens, no matter whether you live in the United States or abroad. The rules also apply to non-resident taxpayers who are required to file tax Form 1040NR.

Whereas U.S. employers are required by law to withhold U.S. tax from the wages of their U.S. employees, when you live and work abroad your foreign employer will most likely not withhold U.S. tax from your foreign wages. Instead, depending on your specific circumstances, the law requires you to make estimated tax payments on a quarterly basis. If your tax liability is smaller that the total amount of estimated tax payments you have made during the year, the difference will be refunded by the IRS. Alternatively, you can chose to have the overpaid amount applied to your estimated tax for the following tax year.

estimated tax

Underpaying your estimated tax may result in a penalty, unless the total amount of your payments was at least as much as your tax for
the previous tax year, the tax balance due on your tax return is 10% or less of the total amount of tax due for the tax year, or your total amount of tax due is less than $1,000.

How to Determine the Amount that Should be Paid

To determine the amount of estimated tax to be paid, a draft tax return must be prepared using information from prior tax years and assumptions about taxable events during the current tax year that influence your tax due on your tax return, making use of the favorable tax provisions that are available to U.S. citizens living abroad such as the Foreign Earned Income Exclusion and the foreign tax credit. Depending on your level of income, the IRS provides for safe harbors – by paying a certain amount you are sure to not be liable for an estimated tax underpayment penalty.

When and How to Make Estimated Tax Payments

For estimated tax purposes, the year is divided into four payment periods. The due dates are April 15, June 15, September 15, and January 15. Missing a due date or paying less than the minimum required amount for a period may result in an underpayment penalty, even if you later make up for the underpayment or even if you are due a refund when you file your income tax return.

There are several ways to make a payment. A prior year overpayment may be credited to your estimated tax for the current tax year. Other options are payments by check, or using the Electronic Federal Tax Payment System (for more information, click here). Each option has its own advantages and disadvantages. However, since not all foreign banks issue U.S.-dollar checks, using the EFTPS is probably the better option.

Please Don’t Hesitate to Contact Us

Please contact us with any questions you may have about estimated tax or anything else about U.S. taxation. We can help you with preparation and filing of your U.S. tax return.