This article was first published on April 15, 2011. It was updated on June 16, 2014, with information relevant to the 2014 and 2014 tax years.
The more you know about the US expat tax preparation basics before you move abroad, the better prepared you will be to file a complete and accurate expatriate tax return and maximize your savings on your US expat taxes. In this post, we are going to go over five key tips regarding expat tax preparation to get you started on the basics to file your US expatriate tax return while living abroad. We also have more in depth information about expat tax preparation in our popular US Expat Taxes Explained series that you should consult for further details.
Five Key US Expat Tax Preparation Tips:
- Make sure you file the correct paperwork to get special tax credits and exclusions on your expatriate tax return when filing abroad.
- Know your state! Each state has individual regulations
- Make sure you get your important mail (and leave the junk behind).
- Be aware of the filing dates for your US expat taxes.
- Understand how your US income will be treated compared to foreign income.
We will go into more details on each of these expat tax preparation basics throughout the article.
Expatriate Tax Preparation Tip #1: How to Apply for Special Tax Credits and Exclusions on your Expatriate Tax Return
First, as an American living abroad, you do need to file US expat taxes even if you are also filing a tax return in the country in which you reside. However, you also get some special tax credits and exclusions on your expatriate tax return to ease the burden. There are two forms that you can use to help save money when filing your US tax return from abroad: Form 2555 and Form 1116. Form 2555 (or the Foreign Earned Income Exclusion) basically protects a large amount of the income (for 2013, it is $997,600; for 2014, it is $99,200) that you earned while living overseas from US taxation. Even if you make less than $97,600 in a year, it is still important that you file your US expat taxes for that year. If you do not, you may be liable for penalties and interest.
Form 1116 (or the Foreign Tax Credit) protects those who are paying income taxes to a foreign government, but it also comes with a lot of restrictions that you need to familiarize yourself with before you try to complete this form. Essentially, Form 1116 gives you a US tax credit for the taxes you paid to a foreign government. Uncle Sam is not unreasonable and recognizes that if you have paid country X you will not be able to pay that same money to the US. To qualify for these tax credits, you need to qualify for residency in the foreign country or be outside the US for 330 days each year. A word of caution though: These forms are tricky, so you should seriously consider expert help to completed them for you.
Expatriate Tax Preparation Tip #2: Each State Has Its Own Regulations
The second thing on your expat tax preparation checklist should be to determine whether you need to sever ties with the State that you formerly resided in. Many states in the US try as hard as they can to continue to collect state taxes from expats, even if the expat has been out of the US for years. By severing as many ties with the state as you can before you leave, you are giving yourself the best opportunity to avoid paying unnecessary taxes.
This may sound extreme, and there are actually a lot of states with more favorable tax terms for expats. States such as Alaska, Florida, Nevada, Texas, North Dakota, Washington and Wyoming each have no state taxes. This is ideal for both residents and expats! On the other hand, states such as California, South Carolina, Virginia and New Mexico make it incredibly difficult to get rid of your state residency status while living abroad — meaning they still want you to pay US expat taxes even though you are not living in the state. Often, you as the expat must prove to the state government that you are not planning on returning to that state and taking up residency again, which can be very hard to do and often requires updating many of your records with a permanent address in another location (such as driver’s licenses, bank accounts, etc). In this case, expat tax preparation is key! The best way to avoid paying unnecessary State taxes is to sever as many physical ties such as mortgages, bank accounts and bills as you can before leaving.
Expatriate Tax Preparation Tip #3: Make Sure You Know How You Will Get Your US Tax Documents
A third thing to consider is how you will deal with your US mail while you are abroad. You will inevitably receive some mail while you are living and working abroad, so you need to consider how you can make sure you receive the important post at your foreign address. The first thing you should try to do is get electronic statements for everything you can — bank statements, credit cards, mortgages, etc. Then, you should call 1-888-5OPT OUT (1-888-567-8688) to say you don’t want the credit rating bureaus to sell your details, which leads to all those credit card offers that clog your mailbox. Additionally, we’re a huge advocate of mailbox forwarding services such as Earth Class Mail or Mailbox Forwarding. We use Mailbox Forwarding (which led to us also becoming an affiliate of theirs because we recommend the service so much!). Mailbox Forwarding, for example, charges approximately $15 per month to receive up to 40 items and to scan 10 of them for you. If you have a reliable friend or family member, you can also ask them to help out with forwarding your mail. Finally, you will also need to notify the IRS if you are planning on changing your address to ensure that you receive your mail and your correspondence from the IRS. There are a couple of ways to do this. If you change your address before filing your return, you can just change the address on the mailing label and the IRS will update your records this way. If you change it after you file your taxes, you must notify the post office and send a completed form 8822 to the IRS. This will ensure you receive your refund checks. All in all, a key, and often overlooked element of expat tax preparation is simply having access to all the documentation you require to file your expatriate tax return.
Expat Tax Preparation Tip #4: Know The Deadlines!
Another important part of expat tax preparation is simply understanding which filing dates are relevant to you. Normally, the deadline to file your taxes as a US resident is April 15th (this can vary year by year if the 15th is a weekend or holiday). However, if you are an American living abroad, the deadlines to file your US expat taxes are extended until the the 17th of June, 2013, for the 2012 tax year, and the 16th of June, 2014, for the 2013 tax year. This gives you a bit of wiggle room in case your host country has different filing deadlines to receive your foreign tax documents and any important items you will need to get from the US. If you need to, you can also apply for an additional extension on your expatriate tax return until October 15th by completing Form 4868. Please note, if you need to submit the form FinCEN 114 (Foreign Bank Account Report or “FBAR”) to the Treasury, it must be received by the end of June each year, and there are no extensions.
Expatriate Tax Preparation Tip #5: Understand How Your US Income Will Be Treated
One final item that is pertinent to expat tax preparation is to consider how any US income will be treated differently than your foreign earned income. For example, if you rent your house or if you earn interest and dividends in the US, this will be taxed differently than it would be in your country of residence. The Foreign Earned Income Exclusion (filed through Form 2555) offsets income for workers who are living abroad and is only for foreign earned income. So, your US based income will still be subject to the same taxes as it would be if you were living inside the US. The deductions on your expatriate tax return allows you to exclude a lot of the income you make, as well as deduct living and housing expenses that you incur abroad as well, but they don’t really protect your US based income.
One final note: In addition to filing your US expatriate tax return correctly, it is also imperative that you disclose any offshore bank accounts that you have to the US Treasury each year. If you have over $10,000 USD or the foreign equivalent in one or more foreign accounts, you are required to report this every year. Failure to do so may result in fines starting at $10,000, prosecution or both. You report your foreign bank accounts on Form 90-22-1. This form is due on June 30th, and there are no extensions. It is filed separately from your US expat taxes.
As you can see, there are a lot of expat tax preparation basics that you must consider before moving abroad. To make sure you are getting the latest news and advice on expat tax preparation and US expat taxes in general, don’t forget to join us at www.facebook.com/greenbacktax. We also use the blog section on our website to share important info about US expat tax preparation from the IRS. Expat tax preparation is incredibly important, and you must do due diligence before you leave in order to ensure that you file your US expat taxes correctly and you save as much money as possible.
More On Expat Tax Preparation
For more information on expatriate tax preparation, have a look at the next blog post in this series, which covers the Bona Fide Residence Test. If you have further questions on expat tax preparation or would like to learn more about our expat tax services, please contact us.