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Whether you are moving outside the US to start a new job overseas, getting a pay raise as a US citizen working abroad for a foreign company, or working in a foreign country and receiving foreign-sourced self-employment income, you may be wondering if you are going to owe any extra US income or self-employment taxes during the current calendar year, or if you’ll need to make estimated tax payments as an expat. In some cases, you will be able to exclude your foreign earned income under the Foreign Earned Income Exclusion, be able to claim a Foreign Tax Credit, or avoid double taxation of self-employment taxes under a Totalization Agreement. These exclusions may allow your US tax liability on foreign-sourced income to be eliminated or offset, and you would owe no US income or self-employment taxes when the April filing deadline occurs.
However, if you do not qualify for the above-listed exclusions, you may be subject to paying US taxes on your foreign-sourced income, and it’s better to know in advance so that you are able to plan accordingly. Depending on how much is owed when taxes are due in April, you may have an underpayment penalty. Below, we’ve answered common questions about how to estimate payments on taxes for expats, so that you can be sure to remain in compliance while you are living or working abroad.
Form 2210 can be used to calculate the underpayment penalty. In brief, the tax liability is broken out in quarters, and any payments or withholdings are subtracted. An underpayment penalty (currently 4%) is calculated on any outstanding amounts. Note: the IRS will assess interest on the underpayment too!
This question is difficult to answer with certainty because an estimate is just that: an estimate, so you can’t plan down to the exact cent. In fact, you are expected to know what to pay the IRS for the current tax year without knowing the full amount of your taxable income for the current tax year. Adding to the burden is that the IRS may assess an underestimated tax penalty if you do not pay enough US income taxes in a timely manner, either through withholding or making estimated tax payments for the current tax year. (Please refer to IRS Publication 505 – Tax Withholding and Estimated Tax for a detailed discussion about both the underpayment penalty and any exceptions to this penalty.)
Sound impossible? Don’t worry, because it’s not. Additionally, the IRS has provided some guidelines on how much and when estimated tax payments need to be made to ensure that you stay on track with your payments. You will need to be proactive in determining whether or not you will have to make estimated tax payments for the current tax year. Generally, the IRS requires you to make quarterly estimated tax payments for the current calendar tax year if both of the following apply to your specific situation:
According to the IRS, your estimated tax burden will be based on your expected adjusted gross income, taxable income, taxes, deductions, and other credits for the current calendar tax year. Form 1040-ES includes an IRS estimated tax penalty calculator to help you more easily calculate your federal estimated tax payments, so that you are better able to make your payments in advance.
The IRS provides filing dates when your quarterly estimated federal taxes owed are due. 2022 calendar tax year payments are due as follows:
If you’re an expat paying estimated payments, the IRS maintains a list of accepted methods for the 1040-ES, which include:
Greenback accountants specialize in taxes for expats. If you have questions about your expat estimated tax payments, get started with Greenback today!