There are many US expat tax deductions and credits available in the 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! But first, you must decide whether to opt for standard or itemized deductions.
Standard vs. Itemized
Determining whether to go with the standard deduction or using itemized deductions is something you’ll need to calculate carefully. You’ll want to be sure you are taking advantage of the greatest tax deduction available to you, and you also don’t want to spend unnecessary time putting together itemized deductions if the standard deduction will be a better option for you. The most recent standard deductions are as follows:
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When it comes to itemized deductions, there are seven categories you should be aware of:
- Medical/dental expenses
- Taxes you paid
- Interest you paid
- Gifts to charity
- Casualty and theft losses
- Job expenses and certain miscellaneous deductions
- Other miscellaneous deductions
Below, you’ll find a brief description of each category and details that will help you determine whether it’s a deduction that you qualify for on your US tax for expats.
Medical and Dental Expenses
If you incurred medical expenses during the calendar year, you’ll be able to deduct the amount of expenses that exceeded 7.5% of your adjusted gross income (AGI). Truthfully, many people don’t get to take advantage of this deduction for that reason, since that’s quite a high percentage! Allowable deductions in this category include things like expenses paid to doctors, hospitals and/or nurses, prescriptions, medical insurance (paid by you with after-tax dollars), and even mileage incurred to receive medical treatment. Things like over-the-counter medicines, cosmetic surgery or gym memberships cannot be deducted, however.
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Taxes You Paid
This includes any state and local taxes paid during the calendar year. You have the option to choose a deduction for state income taxes paid or the general sales tax attributable to your state. Typical deductions in this category include real estate taxes and personal property (vehicle excise) taxes. Note that you cannot take a deduction for late fees or penalties from your state and local taxes.
Interest You Paid
If you’re a homeowner, this deduction is a big reason why you may want to itemize rather than take the standard deduction, since it includes mortgage interest. You can also deduct mortgage insurance premiums and points associated with mortgages. This category also allows for the deduction of investment interest on US taxes. Another nice-to-know: mortgage interest is deductible on first and second homes!
In order for gifts to charity to be deductible, they must be made to a “qualifying organization,” meaning that it must (in general) be organized or created under the laws of the US. Canada and Mexico actually have treaties with the US that allow for the deduction of contributions to certain Canadian and Mexican charities.
You can take deductions for non-cash contributions; however, you’ll face increased reporting requirements for non-cash donations over $500. Also, if you contribute property to a qualified organization that exceeds $5,000, you must obtain a qualified appraisal that determines the value of the donated property.
Casualty and Theft Losses
If you incur loss to your property due to casualty, disaster or theft, you are able to take a deduction for the loss. Eligible property includes your home, household items and vehicles. You may find that this process is complicated, and you must also complete Form 4684 to support the claim in addition to completing Schedule A. Check out the IRS website for more details about this type of deduction.
Job Expenses and Certain Miscellaneous Deductions
Within this category, certain unreimbursed expenses attributable to your job may be deducted. This category also allows for the deduction of US tax for expats preparation services. Other “miscellaneous” deductions within this category include expenses incurred to earn taxable income, like investment expenses, safety deposit boxes, etc. This would not include personal expenses, though. Once these expenses are totaled, only the amount that exceeds 2% of adjusted gross income will be allowed as a deduction.
You’ll find that this category is the “catch-all” for other itemized deductions that can’t be claimed in other categories. The most typical deduction claimed in this category is gambling losses (to the extent of winnings). Other deductions like losses from partnerships, unrecovered pension investments, and impairment-related work expenses or a disabled person can be taken as well.
Keeping accurate track of the amount of tax deductions is very important when determining whether to use the standard deduction or itemizing your deductions, so you can save the most money on your taxes. Consulting with a tax professional is recommended, as expat taxes can be quite complicated!
Next up, let’s learn about some expat exclusions and tax credits!
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.
Expat Tax Breaks: Foreign Housing Exclusion or Deduction
The Foreign Housing Exclusion goes hand in hand with the FEIE and can offer US tax breaks, if you qualify. 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.
One of the Most Common Tax Credits: 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, and it is one of the most common tax credits. 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 tax credit of up to $2,000 for every eligible dependent child under 17. 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.
One of the Most Common Tax Deductions: 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, and it is a common tax deduction.
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.
US Tax Deductions and Tax Treaties
While not exactly credits or US tax deductions, 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 US expat tax 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!