This article was first published on April 14, 2011. It was updated on June 16, 2014, with information relevant to the 2013 and 2014 tax years.
Need Some Expat Tax About How You Can Save the Most Money on Your Tax Return?
Living and working in a foreign country can be a fulfilling and rewarding experience. However, reaping the full benefits of this experience requires you to do a bit of research regarding your expatriate tax return obligations before you need to file. No one likes filing their US expat taxes, and certainly no one likes spending money that they do not need to. This article will provide you with four great ways to save on your expatriate tax return.
Making sure that you take advantage of the Foreign Tax Credit (Form 1116) and the Foreign Earned Income Exclusion (Form 2555) is critical. These are the key ways you will save on your expatriate tax return. You should also make sure your Foreign Housing Deduction is adjusted for your location. Lastly, ensure your accountant is using the most advantageous foreign exchange conversion dates and that you pay a flat fee for the American tax services you receive. All of these can save you hundreds of dollars on your expatriate tax return.
Expatriate Tax Return Savings Tip #1: Take advantage of the Foreign Tax Credit and the Foreign Earned Income Exclusion
As a US expatriate living abroad and filing your expatriate tax return, you must make sure that you take full advantage of Form 1116 and Forms 2555 . These forms are used to apply the Foreign Tax Credit Form and the Foreign Earned Income Exclusion Form. The Foreign Earned Income Exclusion basically excludes a big chunk of your foreign earned income from your US expat taxes. You may know that even as a US expat, all of the income that you make outside of the country is subject to identical tax rates to someone who is working and living inside of the US. That is where Form 2555 comes in. With this exclusion, you can exclude up to $97,600 0 of income that you have earned abroad from your 2013 US expatriate tax return (and $99,200 on your 2014 return). While including potential deductions for housing and living expenses, it is possible to minimize or eliminate most if not all of your tax liability in a given calendar year.
The Foreign Tax Credit (or Form 1116) is different than the Form 2555 but works along side it to help save you money on your expatriate tax return. Essentially, Form 1116 gives you tax credits with the US government based on the taxes you have paid in your host country. Where a lot of people go wrong with using these two forms is assuming they do not need to file. Simply because you know you will not owe does not mean you do not need to file. You still must file an expatriate tax return even if you know you will not owe the IRS a penny.
Expatriate Tax Return Savings Tip #2: Adjust your Foreign Housing Deduction for the country you live in
A second tip for filing your US expatriate tax return is to make sure your Foreign Housing Deduction is adjusted for the country that you have decided to live in. There are different rates for different countries. These different rates can drastically affect the end result. Using the different rates is important to make sure that this is adjusted. As a US citizen living and working abroad, you may be eligible to deduct some of your housing costs from your income to save you some money when filing your US expat taxes. In order to qualify for this, you need to meet the “Bona Fide Residence Test” or the “Physical Presence Test.” These tests are in place to ensure that you are indeed living and working abroad. The IRS recognizes that you may need to spend more money on housing outside of the US, and thus they allow deductions on the income on your expatriate tax return as a result of this. In general, there is usually a maximum of 30% that you can deduct from your gross income for housing costs. As mentioned, this rate is adjustable depending on where you are living and how it compares to the US standards for cost of living. For example, compared to living in the US, places such as London, Paris, Singapore, Hong Kong, Dubai and Perth all qualify for a much higher deduction rate than the standard rate due to the higher costs of living. Using the right rate can save you a bundle of money on your return!
Expatriate Tax Return Savings Tip #3: Use the most advantageous foreign exchange rate
Third, you need to make sure that the income reported on your expatriate tax return is using the best foreign exchange rate. When filing your US expat taxes, you can choose to convert the foreign income into USD at either the annually average exchange rate or at the specific day rate. Making sure you make the right choice as to what period you choose can also end up saving you money in the long run. For example, if you receive a $10,000 bonus on June 1st and the daily foreign exchange rate is lower than the annual average rate has been, you may want to use the specific date rate to translate it into US dollars as this would lower your taxable income in the USA. If the daily rate is higher then you may want to use the annual exchange rate as this would lower your US tax burden.
Expatriate Tax Return Savings Tip #4: Don’t get overcharged for your expatriate tax return preparation fees!
Finally, it is critical that if you are paying someone to file your expatriate tax return, you agree the fees in advance and ideally pay a flat fee so that you are not surprised by the bill in the end (this happens more often than you think). There are a lot of companies out there that often do not disclose their prices until after you’ve shared a lot of data with them. Many of them have additional charges for the necessary forms and schedules. This obviously means that the bill for your expatriate tax return preparation can increase over the course of preparing the return, at which point your hands are usually tied. Obviously, it should also go without saying that hiring a qualified tax preparer who is an expert in expat taxes is an absolute requirement. The easiest way to lose money on your US expat taxes is to hire someone who does not have the experience to handle your expatriate tax return. One more tip: make sure that when you are researching companies, you ask who on the team actually prepares the return. You don’t want an intern doing the expatriate tax return while getting charged CPA prices!
As you can see, there are numerous ways that you can save on your US expatriate tax return. By understanding the credits and exclusions that are available to you as an expat, you can ensure that you are well-informed and knowledgeable about how your actions can save you money.
Looking for More Expat Tax Advice?
Our blog is full of informative articles on expat tax issues so don’t hesitate to peruse the posts to learn more! And if you would like to learn about our expat tax services, please contact us.