If you’re an American citizen enjoying a life overseas, exploring the pros and cons of filing taxes may be last on your list. Nevertheless, taxes for US expats has become an increasingly hot topic and one that should not be ignored. Here are some important tips to consider that may help you reduce your tax liability while living abroad.
Two Common Tax Problems for American Expats
The two biggest tax liability problems US citizens and green card holders face when living and working abroad are:
· Overpaying their taxes because they do not know the exemptions and credits they are due.
· Underpaying their taxes and becoming subject to interest charges and penalties for not knowing they are violating IRS or state rules.
If you are faced with some of these concerns, you’ll want to ensure you schedule a call with a trusted advisor who can help you understand how you’re impacted by US tax laws.
Reduce Your Tax Liability While Living Abroad
There are some obvious, and less obvious, ways to reduce your tax liability.
1. Look back. If you have been abroad for several years and you have not filed correctly, file amended returns for previous years. As long as failure to file was “not-willingly” done you may be eligible to use the Streamlined Procedure. This allows you to amend your 1040s for the previous 3 years and FBARs (if applicable) for the previous 6 years.
2. Claim Foreign Tax Credits. If you pay tax on earnings in your foreign country of residence, you may reduce your US tax liability by the same amount.
3. Claim Foreign Earned Income Exclusion. If you qualify, you may exclude the first $100,000 (equivalent) of earned income. You must prove you have a tax home in the foreign country, and were out of the US for at least 330 days of the tax year. When calculating the days, it may also benefit you to file an extension for submitting your return.
4. Claim Foreign Housing Exclusion. If you earn more than $100,000 and you rent your foreign home you may be able to deduct some of your rental costs of up to $30,000 (remove) on top of the earned income exclusion. The formula to calculate just how much you can deduct is a complicated one.
5. If Your Spouse is a Foreign National (and not a green card holder or have dual US citizenship) and has foreign earnings or foreign-owned assets, it may be better to file separately. It may, of course, pay to file jointly if the total earned income would take you over the $100,000 threshold.
6. Claim Deductions for Eligible Dependents. You may claim the dependent deduction (you must have their Social Security Number or Individual Taxpayer Identification number) even if they are not a US citizen. This deduction applies to adopted children, children who live with the other parent in a different foreign country or if they are residents of Canada or Mexico for some of the tax year.
7. Claim for Special Exemptions. Some foreign tax treaties offer additional tax exemptions to teachers and trainees.
Some Common Examples of Underpaying or Overpaying Taxes
If you fall into the category of government contractors, teacher, freelancer, independent contractor, or digital nomad then just remember that the US government levies taxes on its citizens regardless of where they live. The United States is the only country to do this.
A few common mistakes that could cause you to underpay or overpay your taxes include:
· Not knowing that foreign-held assets such as bank accounts, mutual funds, etc. may be subject to taxation.
· Not knowing whether it is better to claim Foreign Earned Income Exclusion or Foreign Tax Credits on earned income.
· Not knowing whether, if married to a non-US citizen or permanent resident, if it is better to file separately or jointly.
· Not knowing which countries have Totalization Agreements with the US Government, and how that affects tax liability.
· Not knowing how to correctly calculate foreign currency values into $US equivalents when completing tax forms.
· Not knowing the most tax-efficient ways to calculate “days abroad” in order to claim exemptions and credits.
These are just some of the mistakes taxpayers make. Tax laws are complex, as we all know, and they are even more complex for expat taxes. Filing taxes when living abroad so the correct tax liability is incurred takes a full understanding of IRS rules.
The Takeaway
Tax laws and international tax treaties are complex. Pay all the taxes you are due to pay to the United States government but do not overpay. The best way to make sure you are meeting your tax liability and filing your taxes while living abroad is to seek professional advice. If you would like to discuss your situation and learn how we can help you please just click here for your free consultation with Palazzo & Company.
About Lisa Palazzo
Lisa Palazzo is the Owner and CEO of Palazzo & Company, an tax and accounting firm based in Gulfport, Mississippi. Lisa Palazzo specializes in EXPAT taxes (knowledge earned first-hand from starting her business while working overseas) and working with small businesses. With clients in more than 20 countries, Palazzo has grown since 2001 to become a worldwide service provider specializing in small business accounting, bookkeeping and payroll services, business income tax preparation, and local/individual income tax preparation.