When it comes to being a US expatriate, chances are traveling is a huge part of your lifestyle. This may be especially true during the summer months, as you may spend time visiting family and friends around the world while taking a ‘vacation’ from your adventurous expat lifestyle. It’s very important to keep accurate travel records, so when it comes time to complete your US expatriate tax return, you’ll have the documentation you need in order to take advantage of tax credits, deductions and exclusions. Here are a few you may be eligible for.
The Foreign Earned Income Exclusion
With the Foreign Earned Income Exclusion, you can exclude the first $100,800 of foreign income from your 2015 US expatriate tax. This is a great way to eliminate or dramatically reduce your US tax liability! However, in order to claim this, you must pass one of two tests:
- Physical Presence Test (PPT): With this test, you must be present in a foreign country for at least 330 days out of a 365-day period. These must be full, 24-hour days and do not include time spent traveling, arriving/departing days or time over international waters. This means that you only have 35 days in total to spend outside of the foreign country (including travel time) if you want to qualify for the FEIE with this test.
- Bona Fide Residence Test (BFR): With this test, you must live abroad for at least one full year and have no intention of returning to the US permanently. You are allowed to leave the country for brief trips back to the US, or to another location for vacation or business purposes – but the caveat is you must have a clear intention of returning to the foreign country after your trips. If you’re on a contract assignment for a specified amount of time, you are not eligible to use this test to claim the FEIE, since the IRS assumes that when the time on your contract is up, you’ll be moving back to the States.
Regardless of which of these tests you end up using the claim the FEIE, it’s important to carefully track your travel and any time spent outside of your host country so you’ll have a record when it comes time to file taxes. This travel-tracking template will help you keep an ongoing record of all your travel, so you won’t have to dig through old travel itineraries when it’s time to do your US expatriate tax return!
Travel Expense Deductions
As an expat, there are certain travel-related deductions you may be able to take advantage of on your US expatriate tax return. In order to qualify, these expenses must be directly related to work or the operation of your business – and you must be away from your tax home for a period of time longer than an ‘ordinary day’s work.’ First, you must determine your tax home – where you’re living and working. You may only deduct travel expenses that are required for work outside of your tax home. Specifically, these type of expenses are deductible – as long as they take place away from your tax home:
- Travel by airplane, train, car or bus
- Using your car at a business destination
- Cab fare or fare for other transportation between the airport or train station and your hotel, the hotel and work location, from one customer to another or a place of business to another
- Meals and lodging necessary for you to conduct work
- Tips paid for services related to any of these listed exemptions
- Dry cleaning and laundry
- Business calls made on your business trip, including fax and other communication devices
- Similar ordinary and necessary expenses directly related to business travel
Another deduction to consider is expenses related to finding a job overseas or back home in the States. If you’re looking for a job in the same trade or business you work in, your travel expenses are deductible.
Note that there is a limitation on deductible travel expenses – they are limited to 2% of your total adjusted gross income. You can find more details on the IRS website regarding deductible travel expenses.
How to Report Your Travel Expenses
This is where keeping careful track of travel comes into play! When it comes time to report your travel expenses on your US expatriate taxes, you’ll be glad you have an accurate record of all travel in order to make tax time easier. Here are the forms you may need, depending on your specific situation:
Foreign Earned Income Exclusion: You’ll use Form 2555 to report your foreign earned income, if you pass either the Physical Presence test or Bona Fide Residence test.
Travel Deductions: Depending on whether you have an employer or you’re self-employed, you’ll use one of the following:
- Have an Employer – Your unreimbursed and allowable travel expenses will be figured on Form 2106 or Form 2106-EZ. These expenses are carried forward to Form 1040 (your expat tax return) via Schedule A.
- Self-Employed – You will report your allowable travel expenses on Schedule C or Schedule C-EZ. These expenses are then attached to Form 1040 as part of your expat tax return.
Have More US Expatriate Tax Questions Related to Traveling?
Our team of expat-expert CPAs and IRS Enrolled Agents are here to help. Contact us today and we can help you navigate the your particular expat tax situation in order to save you the most money on your US taxes!