Whether you are new to living abroad or a well-seasoned expat, filing taxes as a US expat is downright challenging, confusing and anxiety provoking. Rest assured, it’s not uncommon for Americans living abroad to make mistakes—but sometimes those mistakes can be costly. Take our expat tax advice to avoid making these 5 errors and tax time will be stress-free instead of stressful.
Mistake #1: Not Filing a Tax Return
Yes, this is definitely one of the mistakes expats make. While most expats end up paying little or no US taxes on their worldwide income, most are still required by US law to file a US tax return to report the income to the IRS. You need to file a tax return with the IRS if your worldwide income is greater than the filing thresholds listed below. Worldwide income includes the following from all sources (both US and non-US): Wages, salary, interest, dividends, rental income, capital gains, gambling winnings, income from a partnership or trust, retirement income, some social security income, and any other income that is generated during the tax year (usually the calendar year). All income must be reported to the IRS, even if it is not taxable in your resident country. Here are the filing thresholds for the 2019 tax year:
|Filing Status||Age||Minimum W-2 Income Requirement||Minimum Self-Employment Income Requirement|
|Single||65 or older||$13,850||$400|
|Head of Household||Under 65||$18,350||$400|
|Head of Household||65 or older||$20,000||$400|
|Married Filing Jointly||Under 65 (both spouses)||$24,400||$400|
|Married Filing Jointly||65 or older (one spouse)||$25,700||$400|
|Married Filing Jointly||65 or older (both spouses)||$27,000||$400|
|Married Filing Separately||Any age||$5||$400|
|Qualifying Widow(er) with Dependent Children||Under 65||$24,400||$400|
|Qualifying Widow(er) with Dependent Children||65 or older||$25,700||$400|
Filing a tax return with the IRS does not mean that you will pay US taxes on your income. Thankfully, there are many tax provisions that allow for you to exclude most or all your income from taxation, and other tax credits that help to reduce your US income tax to zero using the taxes you have already paid to your resident country.
It’s important to note that minor children are not exempt from filing US tax returns. If the minor child has income from any source which exceeds the filing threshold, they are required to report this income on a US tax return. The child’s parent or guardian is required to make sure that the minor child’s return is filed.
Filing your tax return may also open you up for certain tax credits which would allow you to get a refund from the IRS!
Mistake #2: Not using the Foreign Tax Credit in conjunction with the Foreign Earned Income Exclusion
If you use the Foreign Earned Income Exclusion to reduce your taxable income, you may also be able to use the Foreign Tax Credit as well. The Foreign Earned Income Exclusion helps to reduce your income that will be taxed. If your income exceeds the Foreign Earned Income Exclusion ($105,900 in 2019) it’s possible that you may generate US taxes on your excess income. If you live in a country with an income tax, you may be able to use the taxes you paid on your income in your resident country to reduce your US tax liability.
You will be able to use the foreign taxes that are attributed to the income that has not been excluded. Example: You have $200,000 of income and paid $50,000 in taxes to your resident country. You file a US tax return and exclude $105,900 of your income using the foreign earned income exclusion. The amount of foreign taxes you will have available to use on your US tax return is $23,525. ($200,000 – $105,900= $94,100. $94,100/$200,000 = 47.05%. 47.05% x $50,000)
If there are excess foreign tax credits (i.e. your US tax is less than the amount of foreign tax credit you have available for the year) you can ‘carry forward’ the credits to be used in a future tax year.
Mistake #3: Ignoring FATCA and FBAR filings
FATCA and FBAR filings are one of the most common omissions made by US expats and non-expats alike.
FATCA refers to Foreign Account Tax Compliance Act, which became law in 2010. This tax provision targets tax non-compliance by US taxpayers with foreign accounts. It focuses on the reporting of foreign financial accounts and offshore assets. If you have foreign financial accounts (bank accounts, retirement accounts, mutual funds, etc.) or other assets (stocks and bonds) with a total that exceeds the following chart, you will need to file form 8938 with your US tax return.
The FATCA thresholds are as follows:
|Living inside the US|
|Filing Status||Balance at December 31||Balance at any point during the year|
|Married Filing Jointly||$ 100,000||$ 150,000|
|Married Filing Separately||$ 50,000||$ 75,000|
|Single/Head of Household||$ 50,000||$ 75,000|
|Living outside the USA|
|Filing Status||Balance at December 31||Balance at any point during the year|
|Married Filing Jointly||$ 400,000||$ 600,000|
|Married Filing Separately||$ 200,000||$ 300,000|
|Single/Head of Household||$ 200,000||$ 300,000|
IF you are not required to file a US tax return, you do not need to file Form 8938.
FBAR reporting is part of the Bank Secrecy Act, enacted in 1970. This filing requires you to file FinCen Form 114 (also known as the FBAR) each calendar year you own foreign financial accounts whose aggregate balance exceeds $10,000 at any point during the year. This form is filed separately from your tax return and is required even if you are not required to file a tax return.
All bank accounts that the taxpayer has their name on is required to be reported on the FBAR and Form 8938. This includes accounts jointly owned with spouses, children, other relatives, non-relatives and accounts that the taxpayer has a signature authority over.
The forms 8938 and FinCen 114 require much of the same information, so keeping up with the filing does not necessarily require double the effort. Both forms will ask you for the following:
- Highest balance of your bank/financial account during the tax year
- Account number
- Name and address of the financial institution
- Name and address of any joint owners
As it relates to minors, FBAR and Form 8938 do not have an age limit. If a US person minor child owns a bank account(s), either jointly with a family member or alone, and the balance exceeds the filing threshold for the form, the minor child is required to file. The parent or legal guardian is responsible for making sure that the form is filed on time each year.
There are severe penalties for not complying with the filing requirements of FATCA and FinCen Form 114 (FBAR). These penalties could be a hefty $10,000 a year PER FORM for failure to file. Additional penalties would be assessed for not filing if the IRS/FinCen starts sending you notices.
Mistake #4: Not taking allowable deductions/credits
Just because you are living in a foreign country, you don’t have to eschew the benefits that taxpayers living in the US do. There are many different kinds of deductions and credits that could help to lower your US taxes, or even give you a refund!
The distinction between credits and deductions is this: A credit is a dollar for dollar tax reduction while a deduction is a reduction in your taxable income. All else being equal, a tax credit will give you a greater tax benefit on your tax return than a deduction.
The most common types of deductions you can take, which most expats are not, include the following:
- Housing expenses – This is perhaps the largest deduction not taken by expats. If you claim the foreign earned income exclusion, you may be able to increase the amount of the exclusion by housing expenses you paid. These expenses include rent, property taxes (or the equivalent), utilities (not including internet or television service), repairs, personal property insurance (homeowners or renters). This deduction can be as much as 30% of the foreign earned income exclusion. The housing expenses must be paid from employer provided funds, either directly from your employer or paid from your salary.
- Student loan interest – Interest paid on a student loan taken for funds paid to an eligible institution. This amount can be up to $2500 per year! Taxpayers filing as married filing separately do not qualify for this deduction
- Alimony paid – Alimony paid (under a specific court order/decree) to a former spouse
- Moving expenses – Had to move for work? You may be able to take a deduction of the costs to move including transportation of your household goods, storage fees (1 month), airline cost for you and your family (including pets!) , cost of rental trucks, cost of boxes and packing materials, and so much more! If you are taking the Foreign Earned Income Exclusion your deduction for moving expenses may be limited.
- Mortgage interest and property taxes – Mortgage interest is the interest you pay on a qualified home loan for your main home or second home (vacation property). You can also deduct the amount of real estate tax (or the equivalent) on your main home or any property held for personal use.
- Charitable contributions – You may be able to take a deduction for contributions, both of cash and property, to a qualified charity. Most qualified charities need to be a US charity or affiliated with a US charity for the contribution to be deductible on your US return.
- IRA Contribution deduction – If you contribute to a US based IRA (Individual Retirement Arrangement) you may be able to take a deduction of up to $5,500 on your US tax return.
The most common types of credits that expats miss include:
- The Child Tax Credit and additional child tax credit – The child tax credit is up to $1000 per child and could possibly result in a refund for you! The additional child tax credit is a refundable portion of the child tax credit. The child tax credit is able to be claimed if you have US person children dependents on your tax return (under the age of 17 during the tax year). This credit is modified based on your income and filing status. If you claim the Foreign Earned Income Exclusion, you will be ineligible for the additional child tax credit. You should consider all options in calculating your tax return in order to see if claiming the child tax credit will be beneficial to you!
- Foreign Tax Credit – This is a dollar for dollar reduction in your US taxes based on the taxes you have paid to a foreign country. This credit helps to keep your income from being double taxed!
- Child and Dependent Care Credit – If you pay for childcare so that you can work or go to school, you may be able to take a credit of up to $600 per child
- Education Credit – If you or your dependent attend an eligible institution, you may be able to claim up to $10,000 of tax credit, some of which may come back to you in the form of a refund! An eligible institution would include any institution that participates in the US Federal Student Aid program, and can provide you with form 1098-T (which reports the amount spent on tuition and fees)
Mistake #5: Not Claiming the Correct Filing Status
Your filing status is used to determine your filing requirements, deductions and credits, and tax rate. The main factor in determining your filing status is your marital status. Whether or not you are married on the last day of the tax year (either to a US person or non-resident) is an important factor. Here are the different filing statuses you can choose from, if you qualify for more than one filing status, choose the one that benefits you the most:
- Single – You are legally unmarried as of the last day of the tax year. You have no US person dependents. This filing status generally carries the lowest standard deduction and the highest tax rate.
- Married Filing Jointly – You and your spouse combine your income and deductions onto one tax return. Both persons must have a US taxpayer identification number (Social Security or ITIN). This filing status carries the highest standard deduction and lowest tax rates
- Married Filing Separately – You and your spouse file separate tax returns. If only one spouse is a US person, the non-US person is not required to file a US tax return (unless there are other considerations not covered here) and their income is not required to be reported on the US person spouse’s US tax return. This filing status carries the same deduction and tax rates as the single filing status.
- Head of Household – You are not married or are considered unmarried for tax purposes AND you pay more than half the support of a qualified US person dependent. This filing status is unique for expats in that they can be ‘considered unmarried’ if they have a non-resident spouse who has no independent filing requirement with the IRS, even if the spouse lived with you the entire year.
- Qualified Widower – If your spouse died within the last 3 tax years and you have a dependent US person child, you can use the qualified widower status. This status carries the same benefits as the married filing jointly filing status, but without the spousal requirement.
Many expats don’t realize that they need to claim the married filing separately filing status, because they are married to a non-resident alien of the US. This is the largest error regarding filing status on tax returns. Another common mistake made is when a US person files as married filing separately when they qualify as head of household. If you have dependent children for which you pay more than half of the support, you generally would qualify for this status.
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