Preparation for tax season is fast approaching, and for US citizens living abroad, there is no exception. The United States is one of only two countries that taxes its citizens on worldwide income, regardless of where they live or work. If you fall into this category, stay up to date with these eight tips that will help you better prepare for tax season.
If Your Income Is Paid In a Foreign Currency, It Must Be Reported
For US tax-reporting purposes, you must convert any foreign currency you earn into US dollar equivalents. Most expats use the yearly average exchange rate to calculate this. As a client, you may send us your income in foreign currency, and we will do the conversion.
Keep Good Records of Your Pay
If you work for a US employer overseas, not to worry. Your employer will issue a W-2 to both the IRS and to you. However, an employer in another country may not provide this. That’s one reason why it’s so important to keep accurate records of your finances. Meticulously documenting everything and staying organized throughout the year will take some of the stress out of filing your US taxes.
Take Advantage of the Foreign Earned Income Exclusion (FEIE)
The maximum exclusion for this deduction has increased from up to $102,100 in 2017 to $103,900 for the tax year of 2018. To qualify, your tax home must be in a foreign country, and you must meet one of two tests. The bona fide residence test is complex and is evaluated by the IRS on a case-by-case basis. The physical presence test means that you have been physically present in a foreign country or countries for at least 330 full days during the 12 months. If married, and you both work abroad, you can each choose the foreign earned income exclusion. Be sure to check with your accountant if you are married and need to get more details, have questions about bona fide residency or the physical presence test, and on how to take advantage of FEIE.
Apply For the Foreign Tax Credit
A US expat can claim a foreign tax credit (FTC) for foreign income taxes paid. This is especially beneficial in countries where the taxes are high. This tax credit exists to provide relief from double-taxation. The amount eligible for the credit will be limited if you take the FEIE.
Abide By Reporting Guidelines If You Started a Business
If you choose to establish a business while you are living abroad, you will be required to abide by that country’s reporting guidelines. Each country has its own deadline for tax returns, which can pose a challenge if it differs greatly from the US deadline. There are certain countries that will require you to file a tax return in that country as well.
Determine If Capital Gains Are Included In Your Income
The FEIE does not apply to capital gains, dividends or investments overseas. These are included in taxable income. As a US Expat, you may also face increased reporting requirements on foreign mutual funds or investment vehicles. With each type of investment, there may be different tax rules and exceptions. As your tax professionals, we can help you!
Report Self-Employed Contribution Taxes
When you have an employer, whether in the US or abroad, you are not required to pay self-employment taxes. If you are self-employed, however, you may be liable for SECA (Self-Employed Contributions Act) tax. Have questions? Ask your tax professionals at Palazzo & Company!
Make Sure That You Are Filing Your Taxes on Time
Expats who reside outside of the US on April 15th will get an automatic extension until June 15th. If you owe any tax for the last year, however, it is due on April 15th, and the interest will accrue from this date. The exception to this rule are individuals working in a combat zone.
The Bottomline
When you are an expat living abroad, depending on where you live, and your personal financial situation, the complexity of filing your taxes can vary. There are also some significant changes from the new tax bill that may also vary based on your situation.
A few important things to remember:
- The deduction for moving expenses was eliminated
- Interest on a home equity loan is no longer deductible
- Many job and miscellaneous deductions were eliminated
Other factors which can be overwhelming are self-employment taxes on foreign earned income; expat social security taxes; foreign pension treatment; employer contributions; totalization agreements; and tax treaties.
At Palazzo Tax, we’re here to tell you that this doesn’t have to be the case. If you follow these tips and discuss your unique situation with a tax professional, stressing over your taxes will be a thing of the past. We provide you with year-round tax planning and give you the support you need. To learn more, please contact us today.
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About Lisa Palazzo
Lisa Palazzo is the Owner and CEO of Palazzo & Company, an tax and accounting firm based in Gulfport, Mississippi. Lisa Palazzo gained her knowledge as an EXPAT first-hand living overseas in Hungary. She has built upon this foundation by attaining over ten years experience in EXPAT tax service. 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.