11 Jan Advice for US expats paying taxes going into 2022
As we leave 2021 and embark on a new year, US expats need to be fully aware of tax obligations and what is required for successfully paying taxes and avoiding fines.
US taxes can be a challenge for the most experienced taxpayers. Thankfully, there’s US tax advisors and specialists on hand to help whenever you need to make it all simpler and even save you money.
But, ensuring you have all the knowledge within your power as an expat living abroad is essential, whether you hire a tax expert or not.
This handy list will help provide advice on many of the most important aspects of paying tax as an American expat living abroad.
Do always check in with the blog to ensure you stay ahead of any changing rules or US tax laws because, in this uncertain climate, things can change on a dime, and it pays to be aware.
Do expats living abroad have to pay US taxes?
Well, yes and no. Many expats can avoid paying taxes altogether with foreign tax credits and exclusions, which the IRS has put in place to help ensure US citizens living abroad do not end up being double taxed.
The bottom line is, US expats are required to file a tax return if their income exceeds the filing threshold. The US tax system is fairly unique in that wherever a US citizen lives and works in the world; they still have to pay taxes on their worldwide income.
If your worldwide income exceeds the filing threshold
You must file a federal tax return every year if your worldwide income exceeds your specific filing status.
The threshold is $400 for self-employed, regardless of filing status. Although you may be exempt from filing, it may be beneficial to file to benefit from potential credits and refunds. There may be other ‘special taxes’ that require you to file with the IRS.
Your income may exceed the threshold because all these sources are taken into account:
- Wages and salary from worldwide sources
- Rental income
Expat filing extension benefit
To help US expats living abroad, the IRS provides an extension on filing on the 15th of June. Paying US taxes is a different matter. Anything owed still needs to be paid by April 15th. Missed payments could result in unwanted interest and penalties.
The IRS provides those returning to the United States with leeway on their return, meaning you could still be eligible for some exclusions and credits. However, you’d still be required to file by April 15th because you will once again be a US citizen living on American soil.
Everyone makes mistakes
The US tax system is forgiving and allows you to amend mistakes if you catch them in time. Of course, the best way to avoid making mistakes on your US tax filing is to work with a US expat tax expert who can help ensure everything is correct and goes smoothly.
If you discover you have made a mistake on your return, the quicker you amend, the better. Ideally, you want to ensure you catch it before the IRS because you will avoid big penalties.
Do US expats pay double the tax by living abroad?
Thankfully, there are exclusions in place for those living and working abroad. There are credits, deductions, and exclusions to ensure you do not get double the hit of tax by your country of citizenship and your country of residence.
Many US expats can offset income thanks to the Foreign Earned Income Exclusion, Foreign Tax Credit and Foreign Housing Exclusion which all help to ensure you are not taxed twice on your global income.
To qualify for the FEIE, you must pass the Physical Presence Test, which requires you to be present in your foreign country for at least 330 days within a full 365 day period.
You must also pass the Bona Fide Residency Test, proving you have lived overseas for at least one full year and you do not immediately intend to return to the US to live.
Be aware; once you choose to use the Foreign Earned Income Exclusion, you will be required to include it in your tax filing every year. If you stop using the FEIE, you will then be required to wait five tax years before you can claim it once again unless you get approval from the IRS.
There are many benefits to these exclusions, so it’s worth gaining advice from an expat tax advisor to ensure you’re not overpaying and saving wherever possible.
Keep excellent records of everything
The best way to ensure you stay on track is to keep full, detailed and accurate records. Of course, there are people who can help with this and also very handy apps these days, so there’s really little excuse not to cover your bases.
This point is especially important for expats living abroad who travel often. The Physical Presence Test will be invalid if you go outside the abovementioned rules.
So, you must keep accurate records of when, where, how and why you travelled to be able to justify your claim. If you miscalculate, it could add on thousands of dollars when you’re paying your US taxes! The last thing anyone wants is to pay more US taxes than is necessary.