This article was first published on May 23, 2011. It was updated on June 16, 2014, with information relevant to the 2013 and 2014 tax years.
US citizens must file and potentially pay US taxes regardless of where in the world they live. Often times, your residence in a particular country will prompt a tax liability on the income earned in that country as well. The good news is that the US has implemented several opportunities to negate the effects of dual taxation on your US expat taxes. These tools which include tax treaties, credits, deductions and exclusions are the key expat tax preparation components and they are vital to saving you money on your US taxes.
If you have moved abroad to a country that has no personal income tax, it’s possible to completely eliminate your tax liability. To do so, take advantage of the US credits and exclusions during expat tax preparation. Tax-free zones include Monaco, United Arab Emirates, Andorra, Cayman Islands, Nauru, and Norfolk Island, among others. This article will attempt to explain how you to approach your expat tax preparation if you have moved aboard to a tax free zone.
Expat Tax Preparation – US Filing Requirement
US citizens are required to file US taxes regardless of where they reside. For the purposes of 2012 expat tax preparation, you were required to file a tax return if you were a single US citizen and had gross worldwide income greater than $9,750. This threshold is increased to $19,500 if you file a joint return with your spouse. An expatriate tax return must be filed. Also, if you have self-employment income of over $400 you need to file a US tax return.
Are you a US citizen residing in a foreign country? You can generally earn more than $100,000 in worldwide income before having a US tax liability. For 2013, the Foreign Earned Income Exclusion was $97,600 for a single individual; for 2014, it is $99.200. These are increased to $195,200 for the 2013 tax year and $198,400 for 2014 for married couples filing a joint return. Read more about taking advantage of the Foreign Earned Income Exclusion on your expat tax preparation on our blog.
The Foreign Housing Exclusion varies by location but can offer significant tax savings if you are eligible. Live in a tax-free zone? You can likely earn over $100,000 as a single person before have any personal income tax liability at all. That is assuming your expat tax preparation is done correctly!
Record-Keeping Due Diligence
As US citizens, we’re accustomed to receiving tax info at the end of the year that provides annual salary information. However, in a country with no income taxes, this documentation is not required. Therefore, it is the responsibility of the US Citizen to maintain records throughout the year. They must prove your income for expat tax preparation. This means that expatriates living in tax-free zones must be diligent in their record-keeping. This can ensure accurate reporting to the IRS during their expat tax preparation. The best way to approach this is to establish a running spreadsheet that you update throughout the year. Each time you receive a payment for wages or services, put this information in your spreadsheet. Record info about the amount, the date received, and the US equivalent based on the prevailing exchange rate on the date of receipt. This might seem overwhelming. Rest assured it will be a habit well worth developing! Also, be sure to keep proof of the transaction. This can be in the form of a pay stub, bank deposit or photocopy.
The IRS offers several sources to obtain daily and annual foreign exchange rates for your expat tax preparation. Maintaining this spreadsheet throughout the year will simplify your expat tax preparation immensely. You will not struggle to find documentation or determine appropriate exchange rates. This info will be summarized and ready for your expat tax preparation. For more information on what documents you need to gather for your expat tax preparation, visit our article on this topic.
Once your income is translated to US currency at the appropriate rates, this information will be reported on Form 2555 or 2555-EZ. This form will calculate the amount of income that is exempt from US federal tax. Did you make less than $97,600 as a single individual and lived abroad for the entire 2013 year? Or less than $99,200 for the 2014 tax year? The exclusion will wash out and you will have zero federal tax liability. Are you filing a joint return with your spouse? You maybe eligible to exclude up to $195,200 from your 2013 tax return and $198,400 for 2014 . You can file a joint return with your non-US citizen spouse by obtaining a tax identification number. You must both agree to report all of his/her income on your joint US tax return.
It’s important to note that you may still have a state filing requirement even if you owe no federal taxes. Please see our article regarding the state filing requirements for expat tax preparation.
Just because you don’t have to pay does not mean you have no reason to file. You will still have reporting requirements with the IRS and Treasury Department. Do not forget to report your foreign bank accounts. These must be reported if you have $10,000 or more in foreign accounts. You can file this report with Form TD F 90-22.1, or the FBAR. This form is due June 30th every year.
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Here is a post on what documents you will need in no tax zones. If you have further questions about expat tax preparation or would like to know more about our expat tax services, please contact us today!.