Making the decision to move overseas is not one to be taken lightly, especially if you have a family to bring along. There are so many great reasons to live abroad with your family, like experiencing a new culture, meeting new friends and gaining a fresh perspective on the world. Another great reason? Tax credits. Yes, it’s true – there are some great ways for US expats to save on their taxes while living abroad…here are a few you should know about.
Foreign Tax Credit
The Foreign Tax Credit (FTC) is a dollar-for-dollar reduction of your US tax liability on foreign earned income. In order to claim this credit on your expat taxes, you must meet the following requirements:
- You must have a foreign tax liability paid or incurred
- Tax must be assessed on income
- Tax must be imposed on you as an individual
- Tax must have originated legally in a foreign country
You will need to complete Form 1116 in order to claim the FTC on your expat tax return. Note that you cannot use the FTC against income you’ve already excluded using the Foreign Earned Income Exclusion (FEIE). Click here to learn more about the FEIE.
Child Tax Credit
Officially the ‘Child and Dependent Care Credit,’ it helps reduce your expat taxes by offering a dollar-for-dollar reduction on your actual tax owed to the IRS. This is a non-refundable credit, which means it doesn’t have the ability to reduce your tax bill below zero. If you paid for childcare for a qualified child in order for you to work or look for work, you may be able to take this credit (and your spouse, as well, if filing jointly). In order to take advantage of this credit, you must meet the following requirements:
- The child must be your dependent and aged 12 or under. Those who are physically or mentally incapable of caring for themselves may be considered qualified, regardless of age, if you claim them on your US Tax Return as a dependent.
- You must have earned income on your expat tax return. Filing a joint return? You and your spouse must have earned income or be a full-time student.
- Your tax filing status cannot be Married Filing Separately. (Find out what your filing status is by clicking here.)
- You can’t use expenses paid to your spouse (or parent of the dependent) or to another child unless they are aged 19 or older. Basically, you can’t claim amounts paid to the child’s other parent or to a teenage sibling who babysits.
- Your child or dependent must have lived with you for over half the year, with several exceptions for dependents living far away due to divorce, illness or school.
- You must list the name, address, amount paid and US tax ID number of the childcare provider on your expat tax return. Note: foreign providers don’t need a US tax ID.
It’s important to also note that if you take the Foreign Tax Credit, it will come before the Child Tax Credit. This means, if your taxes are reduced to zero by the FTC, you can’t also take the Child Tax Credit, since it’s a non-refundable credit. However, if you don’t use the FTC or still have income left over after taking the FTC, you can also take the Child Tax Credit.
American Opportunity Tax Credit
If your children are attending college, whether in the US or abroad, you may be able to take advantage of the American Opportunity Tax Credit (AOTC). This is a credit for qualifying education expenses that you paid for an eligible student for the first four years of higher education. The maximum annual credit is $2,500 per student, and is partially refundable. This means, if the credit brings your amount of tax owed to zero, you can have up to 40% of the remaining amount of the credit (up to $1,000) refunded to you. You can read more about the specific requirements of the AOTC on the IRS website.
In addition to making sure you take advantage of all the credits, exclusions and deductions available to you, you’ll want to ensure you meet all reporting requirements. This means, making sure you include all necessary forms with your expat tax return and reporting your foreign financial accounts via FBAR or FATCA Form 8938 if you meet the reporting thresholds. Consulting with an expat tax professional is always a good idea while living overseas, as your US tax obligations can be a bit more complex. For more tax tips and ways to save, download our tax guide for Americans working overseas.
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