As an expat living abroad, determining how to save the most money on your American expat taxes is likely important to you. Fortunately, there are a number of savings available to you as a US expat – one type being tax treaties. However, it’s important to understand the ins and outs of this method, as it may not be the most effective way to save.
What Are Tax Treaties?
Tax treaties are applicable to US non-residents or dual-resident taxpayers as a way to prevent being double taxed when it comes to US expat taxes. The US has entered into tax treaties with a significant number of foreign countries to help offset the risk of double taxation on American expat taxes. If you choose to live in a country that has a tax treaty in place, you’ll receive the benefits of it while maintaining your US citizenship – but in many cases, you will need to set up a permanent residence in a foreign country for the benefits to apply. Visit the IRS website to view a list of countries with which the US has tax treaties.
Limitations for US Citizens Abroad
While tax treaties can certainly help you save, the benefits are sometimes limited for Americans living abroad. This is due to the ‘Saving Clause’ – it is a provision built into US tax treaties that limit the reach by guaranteeing the right of the US to impose taxes on its citizens as if the tax treaty doesn’t exist. The goal? To preserve the ability for the US to tax its residents and citizens on their worldwide income when it comes to American expat taxes.
It’s important to note that there is an exception to the saving clause for teachers, students, researchers and trainees. In most cases, if you fall into one of these categories, a tax treaty will exempt you from owing taxes in your host country.
How Tax Treaties Affect Retirement Funds
Generally speaking, non-government retirement funds are only taxable in the country in which you reside. So, if you have a pension from your UK employer but moved back to the US, your pension would only be taxable in the US. Likewise, if you have a pension from a US employer and you’ve retired to the UK, your pension would only be taxable in the UK.
How to Save If You Can’t Use a Tax Treaty
You may be wondering how to save money on your American expat taxes in the event a tax treaty doesn’t apply to your situation or you live in a country without one at all. Fortunately, there are some ways you can still save big on your US Tax Return:
Foreign Earned Income Exclusion – This allows you to decrease your taxable income on your 2016 expat taxes by the first $101,300 of foreign earned income (and $102,100 for 2017).
Foreign Tax Credit – This allows you to lower your tax bill on any remaining income (above the FEIE excluded amount) by certain amounts paid to a foreign government.
Foreign Housing Exclusion – This allows for an additional exclusion from income for certain amounts paid for household expenses occurring from living abroad.
In any event, carefully researching the tax rules and regulations between your host country and the US can help you properly prepare for filing your American expat taxes – and saving big. Download our tax guide for Americans working overseas for more tips on saving money on your expat taxes.
Not Sure How a Tax Treaty Can Help Your Specific Tax Situation?
Contact our team of expert accountants today – we can help you understand how your expat taxes will be impacted based on where you live abroad and work with you to make filing expat taxes a hassle-free experience.