As an expat, you may be well versed in traveling. With the world at your fingertips, visiting new places can become a regular occurrence while you’re living abroad. But, did you know that your travels could have an impact on your US expatriate taxes? It’s so important to keep very accurate travel records, so you’ll have the information at your fingertips come tax time – as you’ll need this in order to take advantage of certain credits, deductions and exclusions that can help you save on your US Tax Return.
1. Tracking Travel for the Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is one of the most popular ways expats save on their US expatriate taxes. For the 2016 tax year, you could exclude up to $101,300 of foreign earned income from your expat tax return (and $102,100 for 2017 taxes) if you used the FEIE – which makes it a great option for eliminating or dramatically reducing your US tax liability. However, you will need to pass one of two residency tests in order to use the FEIE – either the Physical Presence Test or the Bona Fide Residence Test.
- Physical Presence Test (PPT) – You must be present in a foreign country for at least 330 out of a 365-day period – full 24-hour days. The time you spend traveling, arriving/departing or flying over international waters does not count toward the 330 days, which means you can only spend up to 35 days outside of a foreign country (including your travel time) if you want to qualify using this test.
- Bona Fide Residence Test (BFR) – You must live abroad for at least one full year and have no intention of returning to the US permanently. You can leave the country for brief trips back to the US or to another location for business or pleasure – however, you must have a clear intention of returning to the foreign country after your travels. You can read more about the Bona Fide Residence Test in this article.
As you can see, both options require you to keep track of your travels in order to ensure you will qualify for the FEIE. You can use this travel-tracking template to help you keep a record of all of your travels for the year, so you won’t have to dig through old travel itineraries in order to file your US expatriate taxes.
2. Deducting Travel Expenses
There are certain travel-related deductions that expats may be able to take advantage of on US expatriate taxes, but the caveat is, the expenses must be related to your work or the operation of your business. You also must have been away from your tax home (where you live and work) for a period of time longer than an ordinary day’s work. You can only deduct travel expenses required for work outside your tax home – and they include:
- Travel (including air, train, car or bus)
- Using your vehicle at a business destination
- Cab fare or other transportation fare between airport/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 conducting work
- Tips paid for services related to these listed exemptions
- Dry cleaning or laundry
- Business calls made on the business trip, including fax and other types of communication devices
- Other ordinary and necessary expenses directly related to business travel
Job hunting overseas or back in the US? If it’s in the same field you work in, your travel expenses will be deductible. There is an overall limitation on deductible travel expenses – they’re capped at 2% of your total adjusted gross income. Get more details about deductible travel expenses on the IRS website.
3. Reporting Your Travel Expenses on US Expatriate Taxes
So, now you know some of your travel expenses may be deductible – that’s why good recordkeeping matters! Here are the forms you may need to have handy, depending on your specific tax situation:
Form 2555: This is the form you’ll use to report your foreign earned income for the FEIE if you pass either the Physical Presence Test or Bona Fide Residence Test.
Form 2106 or 2016-EZ: This is the form you’ll use to report unreimbursed and allowable travel expenses related to your job if you have an employer. The expenses will be carried forward to your US expatriate taxes via Schedule A.
Schedule C or Schedule C-EZ: This is the form you’ll use to report allowable travel expenses if you are self-employed.
Understanding your US expat tax requirements can be tricky, but a bit of research and planning can make the process simpler. For more expat tax tips and ways to save, download our tax guide for Americans working overseas.
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