22 Apr What To Consider When Completing Your Tax Return as a US Expat
The US tax system can be complicated and it’s important to be able to navigate it in order to avoid unwanted fees or penalties. This system becomes even more complex if you are a US Expat, meaning you are living/working in a country other than your country of citizenship. In order to help you understand the complexities of your US tax code as an expat, I have devised a list of some key facts to keep in mind when completing your tax return.
When Should US Expat File A Tax Return?
There are multiple circumstances that will mean you need to file a US tax return. These can include if you receive certain credits, if other special situations are applicable but mostly if your income exceeds the filing threshold. The filing threshold varies depending on your status, for instance if you are self-employed then the threshold is $400. You should consider your worldwide income and if that exceeds the threshold that applies to you, you need file a US Federal Tax Return every year.
Your worldwide income takes into account your: wages/salary from both US and non-US sources; dividends; interest; and rental income.
You should also bear in mind that if you are eligible for certain credits and refunds then it is worthwhile filing a tax return even if you don’t meet the threshold. There are other circumstances too where you may need to file a Tax Return such as owning special taxes.
You get an automatic filing extension if you are a US Expat from April 15th until June 15th. Despite this extension, any US taxes you owe are still due by April 15th, so ensure these are paid to avoid accumulating interest or receiving penalties.
If You Make Mistakes on US Expat Tax Return
As stated above, the US tax system can be complicated and as such it is understandable that mistakes will be made. If you find that you have omitted some income on your tax return or if you failed to take all the deductions allowed, you can file form 1040X and amend the Tax Return of that year.
You should file an amendment form before the IRS catch your mistake because the penalties you receive will be less. You should check when these amendment forms are due as they will need to be filed before a specific deadline.
In order to avoid making mistakes on your tax return you may want to consider enlisting the help of a tax advisor or consultant that specialises in US Expatriate tax matters.
Offsetting Foreign Income
Don’t get taxed on the same income twice. US Expats should be able to offset their foreign income using either: foreign tax credits; foreign housing exclusions; or the foreign earned income exclusion.
You are potentially able to exclude up to $108,700 of foreign earned income and housing expenses from US taxation by using the Foreign Earned Income Exclusion and Foreign Housing Exclusion. It should be noted; however, that if you want to use the Foreign Earned Income Exclusion you have to be able to pass a residency test. This will involve you proving that you’re physically present inside a foreign country for at least 330 days of the year. It is important you keep strict track of your time to qualify under this residency test. Note that travel time to and from the foreign country will not count towards your 330 days of residency.
If you don’t qualify for the above by the deadline for filing tax returns but expect to qualify in the near future, you should apply for an extension that gives you more time to qualify. You will need to file Form 2350 to do this.
Foreign Tax Credits
If you are residing in a country with high-tax or your income exceeds that of $108,700 then you may still be able to eliminate or offset your US tax liability by using the Foreign Tax Credit. This is a dollar-for-dollar credit on any taxes you have to pay that come from a foreign country. For this you will need to file Form 1116.
If any of your income is being excluded using the Foreign Earned Income Exclusion, then you will not be able to also use Foreign Tax Credit’s on that income.
Dependent Children
If you have dependent US children then the Child Tax Credit could be useful as this can result in refunds. Your child will need to have a US Social Security number in order to qualify for this tax credit.
Similarly, you may be eligible for deductions on the costs of looking after your children using the Child and Dependent Care Credit. It should be noted; however, that in order to qualify for this credit, you must have an income. This means that if your income has been excluded using the Foreign Earned Income Exclusion then you will not qualify.
Renouncing Citizenship
If you are considering renouncing your citizenship to avoid having to file your taxes every year, you should note that this may not be the solution you’re looking for. You will still need to provide evidence that you have complied on US taxes for 5 years prior to the date you renounce your citizenship.
If you do retire abroad then you might be able to continue to receive social security benefits, in fact, there are very few countries where you would be unable to receive your benefits. These may be taxed in some countries but even if they are, only 85% can be considered taxable.
US Income
Any income you have earned in the US is not foreign earned income and therefore it cannot be excluded from your taxes. Be sure to consider if you are able to use the Foreign Tax Credit for this income.
State Tax Return
Some states will require you to file a state tax return so it is empirical that you consider the rules of your state, especially if you intend on one day returning. States where you will be required to file a state tax return include but are not limited to New Mexico, North Carolina, Virginia, New York and California.
Next Steps
Consider the above and decide what option you think is best for you before you begin completing your US Tax Return. Ensure that you make this process as simple as possible by keeping track of any important documents you obtain throughout the year. Also consider enlisting the help of a specialist if the process seems too daunting. It is better to be sure you are filing your taxes correctly and avoiding any unwanted fees.