Deductions this year? Here is how to complete Schedule A on your US expat taxes.
When you file your US expat taxes, you will either use the standard deduction or itemize your deductions to reduce your taxable income. The standard deduction varies from year to year, and is correlated to your filing status. However, if you have more itemized deductions than the standard deduction for that year, it will be in your best interest to complete Schedule A to claim them. This article discusses the various itemized deductions available and how to report them on Schedule A.
The first question you’ll want to ask yourself is whether you think you will have enough itemized deductions to exceed the standard deduction. Many people put a lot of work into gathering documentation to support itemizing their deductions, even though the standard deduction is clearly larger. You will want to use whichever one provides the greatest reduction in your expat tax liability. For recent years, the standard deduction is as follows:
There are seven categories of itemized deductions:
- Medical and Dental Expenses
- Taxes You Paid
- Interest You Paid
- Gifts to Charity
- Casualty and Theft Losses
- Job Expenses and Certain Miscellaneous Deductions
- Other Miscellaneous Deductions
This article will provide a brief overview of each, and the associated (and often misunderstood) limitations of each.
Medical and Dental Expenses
Any medical expenses you incurred during the calendar can be deducted. However, you can only deduct the amount of expenses that exceeded 7.5% of your adjusted gross income. For this reason, many people rarely get to take advantage of this itemized deduction. Allowable deductions under this category include expenses paid directly to doctors, hospitals and/or nurses, prescription medication, medical insurance (paid by you with after-tax dollars), and even mileage incurred to receive medical treatment. You cannot, however, deduct the costs of over-the-counter medication, cosmetic surgery or gym memberships.
Taxes You Paid
This category includes any state and local taxes paid during the calendar year. You can choose to take a deduction for state income taxes paid or the general sales tax attributable to your state. The most common deductions in this category are real estate taxes and personal property (vehicle excise) taxes. You cannot take a deduction for late fees or penalties associated with state and local taxes.
Interest You Paid
For homeowners, this is perhaps the deduction that makes itemizing deductions more appealing than taking the standard deduction, as this category includes mortgage interest. Also deductible under this category are mortgage insurance premiums, and points associated with home mortgages. Furthermore, mortgage interest is deductible on the first and second homes of US taxpayers. This is also the category that will allow for the deduction of investment interest on US taxes.
Gifts to Charity
Taking deductions for charitable contributions on your US expat taxes can be a confusing process for many expats. For a contribution to be deductible, it must be made to a “qualified organization,” meaning that the organization must (generally) be organized or created under the laws of the US. Canada and Mexico have tax treaties with the US that allow for the deduction of contributions to certain Canadian and Mexican charities.
Deductions are allowed for non-cash contributions, but reporting requirements are increased for any non-cash donations over $500. Furthermore, if you contribute property to a qualified organization that exceeds $5,000, you must obtain a qualified appraisal determining the value of the donated property.
Casualty and Theft Losses
If you incur a loss to your property due to casualty, disaster or theft, you can take a deduction for the loss of your property on Schedule A of your US expat taxes. Property eligible for the deduction includes your home, household items and vehicles. This process can be complicated and requires the completion of Form 4684 to support the claim. For more information on taking a deduction casualty and theft losses on your expat taxes, please visit the IRS website.
Job Expenses and Certain Miscellaneous Deductions
Under this category, employees can deduct unreimbursed expenses attributable to their jobs. This is also the category that allows for the deduction of US expat tax preparation expenses. With regard to this category, “miscellaneous deductions” includes other expenses incurred to earn taxable income, such as investment expenses, safety deposit boxes, etc. This does not include personal expenses. Once these expenses are totaled, only the amount exceeding 2% of adjusted gross income will be allowed as a deduction on US taxes.
This category is the catch-all for other itemized deductions that cannot be claimed in other categories. The most common deduction claimed here is gambling losses (to the extent of gambling winnings). Other deductions included losses from partnerships, unrecovered pension investments, impairment-related work expenses of a disabled person and other elaborate matters.
Example: Blake and Lauren Expat
Earlier in our US Expat Taxes Explained series, you were introduced to Blake & Lauren Expat: Montana natives who moved abroad to become professional samba dancers.
Even after Blake & Lauren moved abroad, they had trouble selling their home in the US. They did not sell it until October 2010, and thus made payments against the mortgage through the majority of 2010. According to the 1098 issued to them from their mortgage lender, they paid $10,550 in mortgage interest and $3,000 in property taxes (escrowed with their mortgage) in 2010. They are relatively healthy, and thus incurred minimal medical expenses in 2010; not enough to exceed 7.5% of their adjusted gross income.
However, to help out with Blake’s little brother’s troop, they made four cash donations of $150 each to the Boy Scouts of America through 2010. Unfortunately, the Boy Scout popcorn they purchased and had shipped to Brazil will not be deductible.
Furthermore, as a professional travelling samba dancer, Lauren personally incurred travel expenses of $4,000 on behalf of her employer to travel to different show locations. They paid Greenback Tax Services $279 to prepare their 2010 US expat taxes (they received a $50 discount for being return customers!) Their adjusted gross income for 2010 was $65,000.
Because Blake and Lauren file a joint return, the standard deduction for their 2010 US expat taxes would be $11,400. Simply from looking at the 1098 received by their mortgage lender, we know that Blake and Lauren’s itemized deduction will exceed their standard deduction, and thus we begin the completion of their Schedule A as follows:
Lauren’s travel related to her position as an employee of the Brazilian dance troupe is deductible, but must be reported on Form 2106. If you are claiming travel, transportation, meal or entertainment expenses related to your position, you must complete and attach Form 2106 to your US expat taxes.
There are numerous other factors that can make Schedule A quite a bit more complicated. For the purposes of this example, however, we have kept it relatively simple. Furthermore, the deductions shown on the Schedule A above are the more common ones claimed on US expat taxes.
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