As a US citizen, filing a US Tax Return is a necessity – no matter where you’re living in the world. But that doesn’t mean you will owe money to the IRS – there are a number of ways you can save money on your expat taxes – from credits, deductions and exclusions to filing by a specific date. Get all the details you need here so you can save the most money on your US expatriate taxes!
1. Save Big with the Foreign Earned Income Exclusion
Many US expats find the Foreign Earned Income Exclusion (FEIE) to be a great tool for saving on US expat taxes. The FEIE allows qualifying expats to exclude the first $101,300 of foreign earned income from your 2016 expatriate taxes (and $102,100 from 2017 taxes). There are two ways to qualify for this exclusion:
- Physical Presence Test: This test requires that you live abroad for 330 out of any 365-day period.
- Bona Fide Residence Test: This test requires that you live outside the US for a full calendar year. Additionally, you must not intend to return to the US to live for the foreseeable future and show that you’ve established your residence in the foreign country.
The FEIE only applies to earned income, so things like dividends, interest or capital gains cannot be excluded using this exclusion.
2. Consider the Foreign Tax Credit
The Foreign Tax Credit (FTC) is a dollar-for-dollar reduction of your US tax liability on foreign earned income. The FTC cannot be taken on income already excluded with the FEIE, but can either be used in place of the FEIE or taken on any income above the FEIE exclusion limit. In order to use the FTC, you must meet the following criteria:
- You must have foreign tax liability that was paid or incurred.
- The tax must be assessed on income.
- The tax must be imposed on you as an individual.
- The tax must have originated legally in a foreign country.
You can learn more about qualifying for the FTC on the IRS website. If your FTC is larger than your US expatriate tax liability, you can carry the credit back to the tax year immediately preceding the current year, or you can carry it forward for the next ten years. So, you could use the excess to gain a refund from the prior year, or you could offset future years’ tax liability.
3. Don’t Forget about the Foreign Housing Exclusion
The Foreign Housing Exclusion works in conjunction with the FEIE to reduce your income by using your housing expenses you’ve paid to increase your FEIE for the year while lowering your income. The purpose of this exclusion is to offset the often-higher cost of living outside of the US. To qualify, you must:
- Also qualify for and claim the FEIE.
- Have qualifying foreign housing expenses, like rent, certain utilities, insurance, furniture rental and more.
- Have paid your housing expenses from employer-provided funds, which can be designated as housing funds or part of your regular salary.
- Have housing expenses that exceed the base amount specific to your location (the base amount is currently 16% of the FEIE).
4. Filing By Tax Day Can Lead to Big Savings
An often lesser-known fact about expatriate taxes is how you can save by filing by Tax Day. Americans working overseas receive an automatic two-month extension to file, which many expats take advantage of. However, if you owe taxes to the IRS, any tax owed remains due by the first deadline – which is April 18th this year – or you’ll accrue interest until your tax is paid. That’s why it can be smart to file by the April deadline if you think or know you’ll owe taxes! If you really aren’t ready to file, though, you can always estimate what you’ll owe and make a payment to the IRS by the April 18th deadline to avoid accruing interest while you begin preparing your expatriate taxes. You can read more about this year’s tax deadlines in this article.
Are You Ready to Get Started on Your Expatriate Taxes?
With the tax deadline quickly approaching, now is the time to start thinking about your expat tax return. Get started with us today and you’ll be paired with one of our expat-expert accountants, who will help you save the most money on your expat taxes.