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.
What Is the Underpayment Penalty on Taxes for Expats?
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!
How Do I Avoid the Underpayment Penalty?
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:
- You expect to owe at least $1,000 in federal tax for the current tax filing year, after subtracting federal tax withholding and any refundable credits
- You expect federal withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current filing year’s federal tax return, or
- 100% of the tax shown on your prior tax year’s federal return (please note that this only applies if your prior year’s return covered 12 months (a full calendar year) – otherwise refer to 90% rule above only).
How Do I Calculate the Estimated Tax Burden for Federal Quarterly Payments with the IRS Estimated Tax Penalty Tax Calculator?
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.
When Are Estimated Federal Taxes Owed?
The IRS provides filing dates when your quarterly estimated federal taxes owed are due. 2020 calendar tax year payments are due as follows:
|Payment Period||Due Date|
|January 1 – March 31, 2020||April 15 – See Filing and Payment Deadline Extended to July 15, 2020 – Updated Statement for tax relief on account of Coronavirus Disease 2019.|
|April 1 – May 31, 2020||June 15 – Extended to July 15, 2020|
|June 1 – August 31, 2020||September 15|
|September 1 – December 31, 2020||January 15* of the following year. *See January payment in Chapter 2 of Publication 505, Tax Withholding and Estimated Tax|
How Do I Make Estimated Tax Payments for the 1040-ES?
The IRS maintains a list of accepted methods for making 2020 quarterly estimated tax payments for the 1040-ES, which include:
- Crediting an overpayment on your 2019 tax return to your 2020 estimated tax
- Mailing your payment (in USD) with a payment voucher on Form 1040-ES
- Paying online via Foreign Electronic Payments or pay by phone using the information on page 3 of the Form 1040-ES instructions
- Paying via electronic funds withdrawal with your 2019 e-filed return
Questions About Taxes for Expats or Estimated Tax Payments?
Greenback accountants specialize in taxes for expats. If you have questions about your expat estimate payments, please contact us!