Ten US Tax Tips For Americans Living Abroad
By David McKeegan
- File a US tax return each year
While this may seem like a no-brainer, there are millions of Americans living abroad who fail to file a US tax return each year. If your income exceeds the filing thresholds (which are very low) you must file a return, regardless of where you live. But there is some good news here: Most expats do not end up owing any taxes in the US thanks to several important deductions, credits and exclusions the US has put in place.
- Use the Foreign Earned Income Exclusion to save
The Foreign Earned Income Exclusion allows you to exclude up to $100,800 of foreign income from US taxation. There’s only one hitch—you must qualify via one of two residency tests. The Physical Presence test requires you to be physically present inside a foreign country for 330 of any 365-day period and the Bona Fide Residence test is for those who have lived abroad for one calendar year and are well-rooted in their new country (i.e. there are no immediate plans to return permanently to the US).
- Reduce taxes with the Foreign Tax Credit
Another way you can save on US taxes is through the Foreign Tax Credit, which is a dollar-for-dollar credit on the taxes you pay to a foreign country. You don’t need to qualify for this credit and it’s especially useful if you live in a high-tax country. For example, let’s say you owe $15,000 in US taxes and you paid $16,000 to the UK. You can completely offset your US taxes because you already paid more in taxes to another country. And in this example, you could actually use that $1,000 difference as a credit to offset future taxes.
- File FBAR on time
In 2016, the FBAR deadlines will change. Instead of the 30 June deadline of years past, FBAR filing will follow the standard US expat tax return deadlines. The first deadline is 18 April 2016 and expats get an automatic extension until 15 June and can file for an extension until 17 October. These extensions now apply to FBAR, as well. FBAR must be filed if you have $10,000 or more in your foreign account(s) at any point during the year. Even if you held that balance for only one day (or one minute), a filing requirement is triggered. Remember that FBAR filing doesn’t incur any tax liability—it is simply a reporting requirement.
- Offset some of your housing costs
With the Foreign Housing Exclusion, you can offset some of your living expenses abroad. However, you must qualify for the Foreign Earned Income Exclusion in order to use it. There is a base amount you can exclude, which is tied to the Foreign Earned Income Exclusion amount (currently $100,800) but there are higher exclusions for those who live in certain high-cost cities. The IRS publishes a list each year outlining the exclusions as they may change from year to year so you’ll want to take a look at that when you get ready to file.
- Don’t ignore FATCA
FATCA, Foreign Account Tax Compliance Act, is one of the most controversial initiatives for expats. Under FATCA, individuals must report their foreign financial assets if they exceed certain thresholds (which vary by residency and filing status). As of last year, the US now requires foreign financial institutions to report on the accounts of their American clients. It’s sort of a system of checks and balances—if you don’t report your assets, your bank will. It is critical that you report your assets if required to do so, as penalties for non-compliance can be very steep.
- Get caught up if you are behind
Millions of Americans are behind on their US tax returns because they were not aware of their need to file. While this may incite fear into those who realize they are behind, it is never too late to get caught up. And now is a great time. The IRS created the Streamlined Offshore Filing Procedures to help innocent taxpayers get caught up and they recently waived all late filing and FBAR penalties. This is great news for expats who are worried about the financial impact of becoming compliant. The IRS has not stated a ‘closing date’ for this program so it could end at any time. We highly encourage you to take advantage of this program while it is still available.
- Track your travel time to the US carefully
If you plan to qualify for the Foreign Earned Income Exclusion with the Physical Presence test, time spent in the US is critical. The requirement to spend 330 days inside a foreign country means 330 FULL days. So time spent in the air or on the ocean traveling back and forth from the US doesn’t count towards that requirement. Spending even one day too many in the US can have serious financial consequences so keep an accurate travel log.
- File an extension to qualify for deductions
Planning to utilize the Foreign Earned Income Exclusion but not overseas long enough? No problem. If tax time rolls around and you haven’t spent enough days abroad to qualify, simply file an extension until 15 October (or 17 October in 2016). If that isn’t enough time, you have the option to file Form 2350 which provides you an additional extension to such time when you believe you will qualify. Remember that you can only file this form if you plan to use the Foreign Earned Income Exclusion.
Filing US taxes can certainly seem daunting for Americans overseas, but there is one sure way to make it easier: document everything and stay organized. Typically the most challenging part of the tax preparation process is gathering the necessary documents. If you are organizing your documents throughout the year and clearly documenting your travel and/or expenses, filing US taxes will be much less stressful!
Nobody likes filing US taxes, but it doesn’t have to be overwhelming. Remember that you can always prepare your taxes on your own, but working with an expat tax professional will help you save the most money possible and feel confident about the accuracy of your returns.