Top US expat tips for tax season
Tax season is upon us again, and for Americans living abroad this means not only having to file form 1040, put potentially other forms too. The US is the only developed nation to tax based on citizenship rather than on residence, meaning that as a US citizen or green card holder, wherever you live or earn in the world, you are liable to pay income tax to the IRS on your worldwide income. Seeing as in all likelihood you'll have to pay tax on your foreign earned income in the country where you live too, this opens up the possibility of paying tax twice on the same income. Thankfully, with proper planning, you can take advantage of the various programs and exceptions designed to prevent this. It's important to be aware that you still have to file though. Read on to discover our top tax tips to help you to minimize your US federal income tax liability this year.
Don't stick your head in the sand
It's public knowledge that there are several million more Americans living abroad than tax returns being filed by them. These millions not filing either don't know that they ought to be filing, or believe that they can remain under the IRS' radar, but they are all in for a rude awakening at some point over the next few years.
In 2014, under the FATCA legislation, the IRS began compelling foreign banks to provide account info of any US account holders. As such, the IRS knows what income US expats received into foreign bank accounts in 2015. If a return doesn't match this info, or if there is no return filed, a letter to the address the foreign bank account is registered to may be posted.
The good news is that if you've been living abroad but haven't filed before there's a program called the IRS Streamlined Procedure that allows you to begin filing without paying any penalties for previous non-compliance. You simply have to submit your last three returns and your last six FBARS (more about these later), and self-certify that you haven't been wilfully tax-avoiding.
Know what you have to do
The first step when planning to file is to understand what you have to file and by when. If you earn more than $10,000 from any source, you have to file a form 1040. Any tax due should still be paid by April 15th, however expats have an automatic filing extension to June 15th, and this can be extended further online until October 15th.
If you have overseas assets (including property) worth over $200,000, you also have to fill in and submit form 8938 with your 1040.
If you have over $10,000 in total in one or more foreign accounts at any time during the tax year, you have to declare these accounts FinCEN form 114, also known as an FBAR (Foreign Bank Account Report). This needs to be filed by June 30th this year, though from next year onwards it will have the same filing deadlines as form 1040.
Know your exclusions
The two primary ways to avoid paying tax on your foreign earned income twice are the Foreign Earned Income Exclusion (FEIE), and the Foreign Tax Credit.
The Foreign Earned Income Exclusion allows you to exclude your first $100,800 of foreign earned income from US tax. Once you claim it, you must continue claiming it in subsequent years until you renounce it. Once you renounce it, you can't claim it again for five years.
The Foreign Tax Credit meanwhile allows you to claim a dollar credit against your US income tax liability for every dollar of tax you've paid in your country of residence.
They can be combined, with tax credits claimed for income over the FEIE threshold, however if you are paying higher rates of income tax in your country of residence than in the US, it normally makes more sense just to claim the Foreign Tax Credit, as you'll be able to claim more credits than the tax you owe to the US, and the extra credits can be carried forward for future use.
There are other exemptions, notably the Foreign Housing Exclusion, which allows you to exclude housing expenses such as rent and utilities, and the Child Tax Credit. Please note that as of 2015, you can't claim the Child Tax Credit if you are claiming the FEIE.
Gather your documents
Whether you're filing your return yourself or getting help from an expat tax professional, it's worth gathering all your info before you start. If you filed last year, you'll just need:
- Your last return
- Records of your 2015 income
- Records of any foreign tax paid on this income
- Foreign account financial statements for 2015, for your FBAR
If you haven't filed before but are ready to start, you'll need:
- Income and foreign tax records for the last 3 years
- Foreign account financial statements for the last 6 years, for your FBARs.
If you're married to a foreigner, file separately
If your spouse isn't a US citizen or green card holder, elect to file as 'married filing separately', otherwise they'll have to file a federal return and pay tax to the IRS.
File an extension if you haven't been abroad for a full year
If you've been living abroad less than a year, make sure you request the additional filing extension until October 15th, to give yourself time to complete a full year abroad and so qualify for the FEIE or Foreign Tax Credit.
If in doubt, talk to a professional
Tax filing is more complex when you are living abroad than if you are living in the US, and the penalties can be harsher too, so if you aren't sure about anything, get in touch with a US expat tax specialist.