We all know that knowing and searching about the US tax code is a daunting task. And when you are a US expat, the details are even more confusing and complex.
To aid you in clearing up these complex needs, we have made a list of the best 25 things all expats must remember when filing US expat taxes.
Key Takeaways
• There are several tax deductions, and credits available to assist expats in erasing or reducing their US tax bill
• Almost every American resident should file a United States federal income tax return no matter where they work or stay
• Most expats have to file additional United States tax forms such as FATCA and FBAR
Do expats have to file United States taxes?
Yes, virtually all the residents of the United States have to file a United States income tax return regardless of where they stay in the globe. It also implies as long as your worldwide income exceeds the minimum threshold, that differs by filling status.
Also, worldwide income might include the following:
• Rental income
• Wages
• Interest
• Dividends
• Salary
If you are self-employed, the minimum criteria to file income tax is $400, regardless of your filing status. If your income does not exceed the criteria for your filing status, you might have to file income tax. For instance, if you get particular income tax refunds or credits, you might have to file even if you will not meet the requirements.
Many American Expats don’t owe United States taxes.
The US has put many crucial exclusions, credits, and deductions in place to make sure Americans staying overseas are not taxed twice on the same income. Several expats will erase their United States tax bills using these benefits of taxes.
Most expats will erase or offset their foreign-earned income with the following:
• Foreign housing exclusion
• Foreign tax credit Foreign earned income exclusion
You should not pay tax on your income twice. United States taxpayers might be eligible to claim the FTC or foreign tax credit against income that their host nation has taxed.
You should file your income tax return to prove that you are eligible for these perks. For the exclusions, you should become an official expat and must have foreign-earned income.
Take note
If you don’t owe any income taxes, you still should file your income tax return in the United States.
You may eliminate or reduce US taxes for expats with FEIE.
For the 2022 income tax year, you might exclude up to $112,000 of foreign-earned income from the taxation of the US with FEIE exclusion. It is the most common method for expats to decrease or eliminate their liability of US tax. The foreign-earned income exclusion is indexed to inflation, so it increases every year for income earned in the year 2023. The exclusion might be $120,000, which is 7.1 percent more than the income tax year 2022! This is the most common method expats use to eliminate or decrease their liability of US taxes.
You may plan to exclude some housing expenses, such as utilities or rent, using the FHE or Foreign housing exclusion.
Take note
The FEIE or foreign earned income exclusion may be applied only to earned income, not unearned or passive income. It is not at all possible to use the FTC or FEIE both on the same income. Also, you might claim each credit for a different income if it is beneficial to do.
The FEIE is not at all automatic.
You should become eligible to use FEIE, but you should also elect it by filling out forms 2555-EZ or 2555. Once you prefer to use FEIE, it remains in effect, and you may include it on your expat income tax returns every year. Also, you can decide that you no longer wish to use it. One cannot claim the exclusion for the next five years without getting approval from the IRS.
You should pass a residency test to use FEIE.
There is a certain eligibility criterion for using FEIE. If you wish to use the FEIE, then you must become eligible for the bona fide residence test or physical presence test. The PPT or physical presence test requirement is that you should be present physically inside a foreign nation for 330 of any 365 days.
When it comes to Bona fide residence test, you should have lived abroad for at least one financial year and have no immediate planning to move back to the United States. In this scenario, temporary abroad contractors and those on assignment will not qualify at all.
You must track travel time carefully to make sure you become eligible as an expat
United States expatriates seeking to claim the FEIE should pass either the PPT (Physical presence test) or bona fide residency test. Timekeeping is vital. If you fail to follow the strict physical presence needs of either test, you might lose your right to claim the foreign earned income exclusion.
If you plan to become eligible through the Physical Presence test, you should be present physically inside a foreign nation for complete 330 days, so any time when you spend traveling by sea or even air to or from the United States of America won’t count. You must keep track of the actual dates of travel.
A small mistake in calculations will cost you even thousands of dollars on your United States expat income tax return.
You may file for an extension if you require more time to become eligible.
Several expats move overseas in the latter part of the year and think that they will not become eligible for the FEIE or foreign earned income exclusion and might miss out on substantial tax advantages. If you expect to become eligible in the coming years, you may apply for an extension until 15 October, or you may file form 2350, which buys more time for you.
The FTC, or foreign tax credit, is another way to reduce your United States expat taxes.
If you stay in a high-tax nation or your income exceeds the FEIE or foreign-earned income exclusion, the FTC or foreign tax credit might assist you in neglecting or offsetting your liability to the United States.
The FTC, or foreign tax credit, is a dollar-for-dollar credit on the income tax you pay to a foreign nation. You should file the 1116 form to elect it. Several taxpayers become eligible for both the FTC and the FEIE. Also, taxpayers will also claim the CTC or child tax credit. Selecting the FTC over the exclusion may often yield better savings in taxes.
Income excluded cannot be offset with the FTC.
When you claim the FEIE, the FTC, or both might affect the outcome of your income tax return. You must determine all alternatives before filing income tax returns. For instance, if you had been using the foreign-earned income exclusion but consider to switch to the FTC, you might find yourself locked out of the foreign-earned income exclusion for five years.
If you prefer to exclude a few of your income with the FEIE, then you cannot use the FTC on that income excluded. For instance, you exclude $112,000 of your income, and you have left with $30,800. You may offset the expat income taxes that you pay on the remaining income. It helps you to prevent double-dipping in the eyes of the IRS.
If you think that you cannot claim the complete amount of foreign income taxes that you accrued or paid, you may carry them for the coming next decade and even carry them back to the previous financial year.
Tax treaties assist you in preventing double taxation for United States Expats.
Undoubtedly, income tax treaties assist you in preventing double taxation for Americans staying in a foreign nation by eliminating or decreasing US taxes for expats of a particular income type. The United States has tax treaties with more than 69 countries. As the tax breaks differ from country to country, expats must review the treaty with their host nation to consider how they may be taxed. Like any legal paperwork, tax treaties can be tough and complex to know. If you are unaware of which regulations to apply to you, consult an accountant.
Dependent kids on your United States income tax return might aid in decreasing your expat income taxes.
The CTC or child tax credit might be beneficial for those with dependent US kids (Permanent residents or citizens)- and will, at times, even result in a refund! In order to become eligible for the credit, all dependent kids should have a United States SSN or Social Security Number.
Also, you can deduct child care expenses using the Dependent care credit and the Child Care Credit. Also, you should have earned income to use this credit. If you have excluded all of your earned income using the FEIE or foreign earned income exclusion, you should not be able to use the CCC or Child Care Credit.
The CTC or Child Tax Credit will be worth up to $2000 for every child in the financial year. Also, an income limit will apply, and those who stayed outside the United States for more than six months will only get a maximum CTC or Child Tax Credit refund of $1500 for every kid.
Including kids on your expatriate income tax return has long-term implications.
Kids who are born to non-US parents abroad may become eligible to be reported on your US Federal income tax return as a dependent. While the CTC or Child Tax Credit you may receive can be financially beneficial, you must remember that they are now determined as United States individuals and may forever have a US obligation of taxes unless they select to renounce their citizenship once they are a teenager.
Expats get an automatic income tax filing extension until 15 June.
United States taxes for expats who stay outside the United States of America on 18 April 2023 get an extension until 15 June to file income tax. Also, any taxes owed should be paid by 18 April to eliminate interest and fines.
If you move back to the United States of America, you might still become eligible to use particular US expat exclusions and deductions that financial year, but you have to file by 18 April as you are now a United States resident.
Few states need you to file a state income tax return while staying overseas.
Every state has different regulations related to a permanent place of abode and domicile, which aspect into whether you may be determined as a resident and also have to file income tax. Whether or not you plan to file a state income tax return as an expat, one critical aspect is whether you intend to return.
For instance, Massachusetts states that one cannot change their domicile by taking a longer or temporary than expected absence from Massachusetts. You should not intend to return.
Even if you have no thoughts of returning, several United States continue to tax residents who shift away until they sever ties with that state. Varying on the state, it will be a simple process, or it will be tough. Few states make it difficult to remove yourself from their jurisdiction of tax.
For instance, even if you stay in another nation, a state might impose income taxes if:
• You have a verified bank account open there
• You have a kid or spouse staying there
• They issued your current ID card or driver’s license
• You are registered to vote there
• Your car is registered there
• You have to maintain a mailing address there even if you are using a relative address or friend
• You have a property there.
States that are notorious for taxing previous residents include:
• Virginia
• South Carolina
• California
• New Mexico
You may consult a qualified tax expert to know the regulations for your state.
You should file an FBAR if your Foreign account balances exceed the reporting criteria.
FinCEN forms no 114, also named the FBAR or foreign bank account report, is part of the United States initiative to thwart income tax cheats hiding cash overseas. If the aggregate balance of foreign bank accounts exceeds $10,000, you should file. When determining your foreign bank accounts, investments and pensions might come into the picture as accounts that you don’t owe but have signature authority.
The FBAR is electronically filed through the BSA e-filing systems. Also, if the account strikes $10,001 for only one minute or one day, you should file an FBAR. The FBAR is separately filed from your United States expat income tax return.
The FBAR deadline falls on income tax day.
FBAR deadline is 18 April is the same as the federal income tax return due date, with an automatic extension to 16 October. The FBAR is separately filed from the income tax return.
You may have to file FATCA form 8938
Foreign account tax compliance act, or FATCA, is the same as FBAR in that it is planned to prevent United States taxpayers from hiding cash in offshore assets and accounts. It must value particular financial assets that exceed the filing criteria that differ by residency and filing status, form 8938 must be filed. FBAR and FATCA filing needs are separate but similar. You must file FBAR, FATCA, neither, or both.
Pro tip
The passing of the foreign account tax compliance act or FATCA has facilitated the IRS’s capability to enforce the United States filing worldwide. In response to this funding and new legislation, the IRS has introduced plans to hire additional agents to make sure compliance with US tax regulations.
You will still get Social Security advantages when you retire overseas.
If you are planning to retire overseas, rest assured that you will get your SSN or Social Security Number advantages in about any country in which you prefer to stay. There are a few countries where you cannot get SSN, namely:
• Moldova
• Cuba
• Belarus
• Kyrgyzstan
• Azerbaijan
• North Korea
• Tajikistan
• Uzbekistan
• Turkmenistan
• Kazakhstan
Also, even if you stay in one of these nations, you may still gather any back payments owed to you once you shift to a different nation. For instance, let us consider you shifted to Cuba. While staying in Cuba, you cannot get US Social Security payments or SSP. But if you shift to Costa Rica a few years later, you will become eligible to gather any SSP or social security payments you were denied during your time in Cuba.
Important
Ensure that you know the regulations of IRA withdrawals abroad and 401(k) so you eliminate hefty charges.
Your Social Security advantages will be taxable in the United States.
You should report your social security benefits as income on your United States expatriate income tax return. Few individuals may have their benefits taxed, while others may not. If you have other income, your advantages may be taxed. Also, if you stay in specific nations, your Social Security payments might not be taxed by the United States of America. This includes:
• The UK
• Egypt
• Ireland
• Germany
• Canada
• Israel
• Romania
The regulations for these nations, too, differ. You may consult an expat tax expert to know more about it.
Take note
Even if your SSB or social security benefits are taxed, only 85 percent of the complete amount will be determined taxable income.
Totalization agreements consider which nation you pay social security taxes.
The United States has agreements with 28 nations that outline which nation must get your social security payments. This is a necessary thing. Without such an agreement, you will be forced to pay into two systems, and only one will get the benefit. The agreement permit for the credits you earn in one nation to be usable for the calculation of advantages in the other.
Income earned in the United States by expats is not excluded automatically from taxation.
When you earn income from another country, it cannot be excluded from the United States expat taxes with the FEIE or foreign earned income exclusion.
Also, if you do not pay income taxes to another country, you can use or foreign tax credit or FTC as a dollar-for-dollar credit to offset the United States taxes that you owe:
Rental income should be reported on your United States income tax return.
You should report all rental income (domestic and foreign) to the internal revenue service. Also, several expenses regarding the property will offset expatriate liability of taxes.
Repairs to your property are deductible instantly, and improvements take a long time. How do you understand the difference? Repairs restore the assets to their original state, but improvements prolong life and increase property value.
As they differ, you may have to keep track record of expenses for both improvements and repairs to your rental property. Repairs will be taken as improvements and deductions that may factor into calculating losses or capital gains on your expat taxes after you sell your assets.
Renouncing citizenship might not assist you in eliminating United States taxes.
As frustrated expats determine renouncing their citizenship to eliminate the burden of filing United States income taxes before they will do so, they should prove that they have complied with their United States requirement of taxes for at least five years before the renunciation date.
If you think about this alternative, you must take note that depending on your net worth and net, you can be subject to an exit tax whenever you renounce. This is the way of Internal Revenue service ensures that you don’t have to renounce skipping out on a tax debt.
You would amend a previous United States income tax return if you made a mistake.
Mistakes do take place. If you didn’t take all the allowed deductions or if you have failed to report income on your income tax return, you have to file an amended return for that financial year using the 1040-X form.
Filing an amendment before the internal revenue service catches the mistake is the best alternative, as charges are often less. Once you file the original return, the clock starts ticking, and amended returns have to be filed before a particular date to get a refund or credit.
You will get caught up with your FBAR forms and US expat taxes without any charges.
Several expats explored those years after they had moved overseas, and they had to file their United States income tax. They might fear harsh charges and be hesitant to get caught up on delinquent income returns.
Luckily, the Internal revenue service offers an amnesty program to assist expats to come into compliance without facing any charges. It is also named as Streamlined filing compliance process.
To use this program, you have to:
• You have to file FBARs or foreign bank account reports for the last six years.
• You have to file the last three delinquent income tax returns and pay any of the delinquent taxes that you owe during that particular time with the rate of interest.
• Self-certify that your failure to file income tax was an accident and not at all a willful refusal.
• You may file the last three delinquent income tax returns and pay delinquent income taxes you owed during that particular time with the rate of interest.
In most scenarios, this might bring you into compliance with IRS laws. It is the best program for expats who were not aware of their United States tax filing obligations.
Steps to carry out for your United States taxes for expats
Now, we are discussing the top 25 things about expat taxes to determine the next steps depending on your situation of taxes.
You can file a United States expat income tax return every year.
You can plan about filing your United States federal income tax return every year. If you are thinking of skipping the file, it is not at all a wise option. It puts you at risk of costly penalties, audits, and further IRS action. If you are not sure how to file taxes on your own or you don’t think that you have time to do it properly, you can find an expat tax professional you can rely on and delegate prep to them.
You can make a plan to meet all your needs in the filing.
You can outline your other filing needs so you will also meet them. Common things include filing a state income tax return or filing the FBAR to report foreign bank accountants if needed for you, or filing an income tax return for your company.
USTAXFiling.in provides a range of services to ensure that your tax preparation is a convenient experience, no matter what you have to file.
You can get caught up on your expat income taxes ASAP if needed.
If you forgot to file your expat income tax returns, make arrangements to get caught up as soon as possible.
But, if you are behind only one or two years, file late expat income tax returns as quickly as possible to get back on track. If you have not filed taxes for many years, you can use the process of streamlined filing to catch up charges-free.
Important
Major delinquents and serious evaders of taxes may face many repercussions for their actions. The IRS or internal revenue service will revoke the passport of a United States resident who owes taxes and jail time, plus charging a range of penalties for failure to pay or file income taxes.
You can stay organized to ensure your taxes are easier.
Once you understand the needs, filing expat taxes is simple. Also, you may still find it tough to collect your expat tax paperwork every year.
To make the process straightforward and simple, you can keep track of necessary documents throughout the year. In this manner, when it is time to file, you will get all that you want.
Do you have questions? Are you not aware of what to do next? You can get early assistance!
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