There are many deductions and credits available in the US tax code to help you reduce your taxable income and income taxes. Some are specifically tailored to US expats, and can help to lower your US expat taxes to zero, and might even get you a refund!
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is the most common deduction, known to many expats. This exclusion is calculated on Form 2555 and is attached to your full tax return. The FEIE is a reduction in your wage or salary income, therefore reducing your taxable income and ultimately your tax. The FEIE is available to anyone who meets the following criteria:
- If you meet the Physical Presence Test or Bona Fide Resident Test for living outside the US:
- Physical Presence Test – You live outside the US for 330 out of a 365 day window, where the window begins or ends in the tax year. The 365 day window does not have to be a calendar year. Include travel dates into and out of the US as dates within the US.
- Bona Fide Resident Test – Once you have lived a full calendar year outside the US, you may qualify for the Bona Fide Resident Test. The dates are the only set measurement of this test, but you must also prove that you intend to remain in your resident country for the foreseeable future, that you have integrated into the society you live in, and that you consider yourself a resident of that country. The IRS looks at your intent to prove this test.
- If you have foreign wages or salary (earned income). Please note: foreign interest, dividends, and capital gains are not considered ‘earned’ income.
Once you claim the FEIE on a tax return, you must continue to use it on subsequent returns for which you qualify for it. Not claiming it in future tax years may disqualify you from taking it for 5 years or more.
Foreign Housing Exclusion or Deduction
The Foreign Housing Exclusion goes hand in hand with the FEIE. It is an addition to the FEIE, increasing the FEIE by the amount of your qualified housing expenses.
- If you are a salaried employee or wage earner, then you may qualify for the Foreign Housing Exclusion.
- If you are a self-employed individual, then you may qualify for the deduction.
Housing expenses that can be used to calculate the Foreign Housing Exclusion include: rent, utilities (not including TV or internet), renter’s/homeowner’s insurance, property taxes, and furniture rental. There is a calculation involved with this exclusion or deduction which depends upon your resident country and city. Learn how to calculate it now.
Foreign Tax Credit
The Foreign Tax Credit (FTC) is a dollar for dollar reduction in your US taxes using taxes you have paid or will pay (accrued) to a foreign country on the same income. This credit is calculated using Form 1116. Multiple Forms 1116 may be used on your return, as the FTC needs to be calculated separately for different types of income (such as passive income and general income). This credit is used for income that will end up being double taxed by the US and your resident country. The FTC can be used alone or in conjunction with the FEIE, depending upon what is better for your tax situation. The FTC can only be used with foreign income taxes paid; it cannot be calculated using other taxes such as sales or property taxes.
Child Tax Credit
The child tax credit is a $1000 tax credit for every eligible dependent child that is 16 years old or younger on your return. This credit is calculated on form 8812. The Child Tax Credit can be taken in conjunction with the FTC, but may not be available if you use the FEIE. You may also receive a refund of some of the Child Tax Credit (known as the Additional Child Tax Credit) even if you have not paid any taxes to the US! Read more about the Child Tax Credit here.
Educator Expenses Deduction
Educators of children who are in elementary and secondary schools (Kindergarten through 12th grade, or the equivalent) may take up to $250 of deduction on their tax return for school supplies and equipment paid for out of pocket. This deduction is taken directly on your tax return, Form 1040 page 1.
Child and Dependent Care Credit
If you paid a person or organization to care for your children or other dependents (such as grown dependents with special needs, or elder care) in order that you could work or look for work, you may be able to take a credit for some of the expenses paid. This credit is calculated on Form 2441. In order to fill out Form 2441 you will need to have the name and address of the care provider, the care provider’s social security number or EIN (if they have one), and the amount paid for each child or dependent. This credit is only available until your dependent(s) reaches the age of 13, unless the person is permanently and totally disabled.
Totalization Agreements are treaty-like agreements made between the US and other country’s Social Security Administrations. The Totalization Agreements cover the amount of ‘credits’ accrued for old age or social security plans based on work and salary. A Totalization Agreement will also cover US taxpayer’s self-employment taxes, which are the social security and Medicare payments for the self-employed income, by informing the IRS that the Self-employed taxes are being paid to the resident country instead of to the US. Self-employed taxes can amount to 15% or more of the net income from a sole proprietor. It’s important to research if your resident country has a Totalization Agreement with the US before you go into business for yourself.
While not exactly a credit or deduction, a Tax Treaty is a document drafted between the US and a foreign country that details what can and cannot be taxed in each respective country. There are many interpretations of tax treaties, and the right position to use on your taxes can be varied depending upon your individual tax situation.
While this is not a comprehensive list of deductions and credits for US tax returns, it certainly gives you an idea of what you may qualify for to help you reduce your US expat taxes.
Have Additional Questions About Deductions and Credits?
Greenback is happy to help! We are happy to review your specific situation and guide you through which deductions and credits can save you the most money. Contact us with any questions that you have or get started on your US expat taxes today!