Can the Foreign Tax Credit Help You Get a Refund on your American Expat Taxes?

Case Study Using the Foreign Tax Credit

 As an American living abroad, you are required to file US tax returns each year, but that doesn’t mean you will automatically owe taxes to the IRS. The US has put several money-saving deductions, credits and exclusions in place to help reduce or eliminate the dreaded dual-taxation (paying taxes to two countries). This case study highlights the story of a Greenback customer who used the lesser-known Foreign Tax Credit to not only save big on her American expat taxes, but actually obtain a refund!

Meet Katrina

Katrina is a 40 year old US citizen with an exciting public relations job at a well-known company in Germany.  She and her husband (who is a French citizen) and their two children have been living in Germany for nine years. When Katrina left the US in 2005 to move abroad, she had no idea that she was required to continue filing American expat taxes. When she found out she was delinquent, she was shocked—and frustrated!

Katrina is a busy working mom and dealing with complex tax issues that she knew little about was not on the top of her very full ‘to-do’ list. So she started researching expat tax specialists who could help her sort out her tax issues and get back into compliance. She chose Greenback because of the expertise of the accountants and the simplicity of their tax preparation process.

Katrina Meets her Greenback Accountant

It was clear to Katrina’s accountant that the best course of action for her was to file under the new Streamlined Filing Procedures. This Streamlined Procedures were amended in June, 2014 to eliminate the restrictions that kept many expats from filing under this program previously. This program allows expats who were unaware of their US tax obligations the opportunity to get caught up without any late filing or FBAR (Foreign Bank Account Report) penalties. Katrina agreed that this was the right choice, so they moved forward with this plan to get Katrina back into compliance.

Getting Caught Up

Under the Streamlined Filing Procedures, taxpayers must file the last three year’s tax returns. Her returns were fairly simple, though she did have a mortgage payment on both her principal property and a rental property. There are very specific deductions you can take on mortgage payments, as the principal is not deductible but the interest can be. They were having difficulty obtaining the proper information about the mortgages so the correct deductions could be taken. Her accountant was actually able to get started on the returns before Katrina obtained those documents because she was confident Katrina wouldn’t owe taxes, even without that deduction. She did ask Katrina to fill out Greenback’s Rental Property Questionnaire, which outlines rental income that must be reported, as well as any deductions she was eligible for (such as repairs, advertising, management fees and depreciation).

It took Katrina some time to gather the mortgage and rental property information, so the process took a bit longer than normal. To encourage Katrina to gather the right information, her accountant asked her to focus on just a few important items regarding her property rental (such as purchase cost to calculate depreciation, which is usually one of the largest deductions). Breaking the task down into smaller pieces helped Katrina feel less overwhelmed and she was able to start collecting the necessary information.

Outcome

Katrina didn’t need to file FBAR because the majority of her money remained in her husband’s bank accounts. Since her own account balances didn’t exceed the $10,000 threshold, she wasn’t required to report any accounts to the US Treasury.

Once her accountant prepared the bulk of Katrina’s return, it was clear to her that the Foreign Tax Credit could be a huge money-saver. While most expats assume the Foreign Earned Income Exclusion is the best way to save on US taxes, sometimes using the Foreign Tax Credit alone is even more beneficial.

Katrina’s German tax rate was much higher than her US tax rate—meaning she paid more in taxes to Germany than she was required to pay to the US. So instead of eliminating her Adjusted Gross Income with the Foreign Earned Income (and Housing) Exclusion, her accountant applied the Foreign Tax Credit only. As a result, she actually got a refund!

She was eligible for a refundable Child Tax Credit of $2,000 for each of the 3 years she filed, even though she paid no US taxes at all for those years. Unlike the previous version of the Streamlined Filing Procedures, taxpayers can actually claim a refund and remain eligible for the program.

While receiving a refund may not be common, it’s not uncommon, either. Katrina was very surprised and as you can imagine, elated that she ended up with a windfall when she least expected it! The money she received more than covered her costs to file with Greenback so she had no out-of-pocket expenses. She is grateful to her Greenback accountant for not only helping her become compliant, but for truly caring about the outcome and ensuring it was the best possible one—which it certainly was!

Would you like help filing under the Streamlined Procedures?

Our accountants are here to help! Simply contact us today and find out how our expat tax experts can help you get caught up on your American expat taxes.