If you are headed back to the US to live after being abroad for years, there is more than just packing boxes and booking airfare that you will need to consider. Your taxes for the first year you return to the US can be as complicated as when you were living as an expat. This is why you should retain your expat tax preparer for at least the first year you return, if not longer!
Talk to Your Expat Tax Preparer About When To Move
Most people don’t move back to the US on January 1st, and because of this most people end up with a partial year as an expat and a partial year as a US resident. This means that the foreign income will need to be dealt with using the Foreign Earned Income Exclusion and/or the Foreign Tax Credit. Preparing partial year expat returns can be complicated, sometimes more so due to the dual nature of the income, and if prepared incorrectly high fines can be assessed on a taxpayer. It’s important you consult an expat tax preparer to not only ensure the returns are prepared correctly, but to ensure you are receiving the benefits of expat tax deductions and credits.
Continue to Use the Foreign Earned Income Exclusion
While living abroad, many expats use the Foreign Earned Income Exclusion (FEIE) to reduce the amount of their foreign wages that will be included in their taxable income. When returning to the US, some of the FEIE can still be used in the year of repatriation, but will need to be calculated in a different way due to the partial year of living abroad. Calculating this partial year exclusion can be difficult, as there are many factors to consider including how the FEIE was calculated in the past. In addition to the initial year of repatriation, the FEIE may also be taken in future years (even while living in the US), even if you don’t return overseas. The additional years of FEIE would apply if you receive delayed compensation from work completed while you were overseas.
How to Avoid Dual Taxation As a Partial Year Expat
In addition to, and sometimes in the place of, many expats use the Foreign Tax Credit to help offset their US tax obligations. The Foreign Tax Credit is a dollar-for-dollar reduction in your US taxes by using the taxes you have already paid (or will pay) to a foreign country. This credit helps to keep you from being “double taxed” on your income. When you live in a foreign country, where you pay more in taxes than you would in the US, you will often have an excess of Foreign Tax Credit for the year. This excess cannot get you a refund on your US return, but can be carried forward to be used in a future tax year. Leaving a foreign country can trigger a lower tax rate in that country, and therefore you will need the excess credits to keep you from paying taxes to the US. Make sure to consult an expat tax preparer to help you navigate the complicated Foreign Tax Credit calculations needed to be sure that you are able to use as much of the carried over tax credits as you can.
FATCA Can Still Apply After Repatriation
As a partial year expat, most likely you had (or still have) some funds in a foreign bank or investment account. A foreign pension or retirement account is very common, especially if you lived overseas for many years. Being back in the States does not exclude you from the FATCA (Foreign Account Tax Compliance Act) requirements. FATCA requires the reporting of ownership of foreign bank accounts and investments. Being newly repatriated, your requirements will change and you will need to make sure that you are in compliance with the FATCA rules for your tax return and the FBAR form(s). Many of the income thresholds lower once you move back to the US, and this could complicate your return. Having an experienced expat tax preparer will help keep you in compliance with FATCA regulations, and therefore keep you from getting those huge penalties!
These are just a few reasons why you should keep or retain your expat tax preparer. Additionally retaining your expat tax preparer from one year to the next keeps your information intact. There are a lot of different things that need to be kept track of each year, such as your tax treaties and excess housing deductions that may be lost with the change of tax professionals. Your tax professional also knows your return, inside and out, and can assist you better in the (unlikely) event of an IRS inquiry or audit. While the convenience of running out the local tax preparation office is tempting, retaining a true professional in the field of expat taxes could save you money, time, and frustration at tax time!
Get in Touch With an Expat Tax Preparer Now!
If you have any questions about your expat taxes when you return to the US, please don’t hesitate to contact us! We aim to take away the anxiety and hassle of filing your US expat taxes and are here to help.