If you are an American working in another country, here is what you should know in order to remain tax compliant and to reduce your US tax burden.
1. If your foreign income exceeds the filing threshold, file a Federal Tax Return every year. The deadline for expats is June 17th. If you are eligible for certain credits and refunds, or if you owe special taxes, you must file regardless of the threshold, and pay any taxes owed by April 17th.
2. If you discover an error on income reported or deductions taken, file an amended return for that tax year using form 1040X before the IRS picks up the mistake.
3. Don’t pay tax on your income twice! You can offset all your foreign-earned income with Foreign Tax Credit (tax paid to the host country), Foreign Earned Income Exclusion (in 2020 it was $107,600) and Foreign Housing Exclusion (rent and utilities paid). File your tax return to prove your eligibility for these benefits and you may eliminate your US tax liability. Defense Tax Partners can help you to do it the right way.
4. If you are unable to claim the full amount of foreign income taxes paid or accrued, you can carry them over for the next 10 years and even carry back to the previous year.
5. You don’t automatically qualify to use the Foreign Earned Income Exclusion (FEIE). You can elect to use it by filing Form 2555 or 2555-EZ. Once you use the FEIE, you must include it on your returns every year.
6. To qualify for FEIE, you have to prove that you were physically present in a foreign country for 330 of any 365-day period. Temporary overseas contractors and people on assignment don’t qualify. Keep track of your travel dates to make sure you meet the requirements.
7. America has tax treaties with many countries to prevent double taxation of Americans working in other countries. Read the treaty or consult us for interpretation of the treaty with your host country.
8. The Child Tax Credit on your child dependents who are US citizens or permanent residents may reduce your tax or result on a refund. Make sure the children have US Social Security Numbers.
9. Have you been claiming Child Tax Credit on children born to a non-American parent overseas? The children are considered US citizens with US tax obligations unless they choose to renounce their citizenship once they reach adulthood.
10. If the aggregate balances of all your foreign bank accounts exceed $10,000, you must file FinCEN Form 114 separately.
11. If the value of your foreign financial assets exceeds the filing threshold, file Form 8938.
12. Any income earned within the US should not be excluded from US taxes with the Foreign Earned Income Exclusion. However, if such domestic income is taxed in another country, you can use the Foreign Tax Credit to offset your US taxes.
13. Report all domestic and foreign rental income to the IRS and use expenses (e.g. repairs and improvements) related to the property to offset tax liability.
14. Some states require you to file a state tax return even while living abroad. Find out what your state requirements are.
15. If you haven’t been complying with US tax requirements, the IRS Streamlined Offshore Filing Procedures to make you compliant without penalties. Call Defense Tax Partners for assistance.
16. When you return to the US, and you are eligible to use certain US expat deductions and exclusion, you must file by April 17th.
17. If you want to renounce your US citizenship, you must prove compliance in the last 5 years first and you may be subject to an exit tax.
18. If you retire overseas, you can receive your Social Security Benefits which you must report as income on your US tax returns. They are not taxable generally, but 85% may be taxed if you have other income.
Do you need help?
If are an American working outside the US and you have problems with taxes, talk to us. We can help you become compliant.