Knowing what to review on your US taxes can be a challenge, but even more so in the case of an expatriate tax return. Some expatriate tax returns can be over 100 pages in length. All the attached statements, schedules and supporting documents add to the length. Are you one of the 60% of US citizens who opt to have their tax returns prepared by a professional and are unsure how to review? This article will help guide you step by step through the process of reviewing your expatriate tax return to ensure it is correct.
US taxes have several main forms or schedules that you’ll want to make sure to give a thorough review. These likely include Form 1040, Schedule B, Form 2555 or Form 2555-EZ, and Form 1116.
US Taxes – Form 1040
This is the face of your US taxes and snapshot of your financials for the calendar year. You will want to review this form carefully to ensure that your name, Social Security number(s), address and filing status are perfect. One common misconception of expatriates is that they are unable to file a joint return with their non-resident alien spouse. This is not true! You can obtain a tax identification number (ITIN) for your spouse. You can then elect to allow his/her worldwide income to be taxed by the US. Filing jointly on US taxes allows a larger standard deduction of $24,000 for 2018, double that of Married Filing Separately. Both the taxpayer and spouse can claim the Foreign Earned Income Exclusion if they qualify under the Bona Fide Residency or Physical Presence Test and have foreign earned income. Read more about filing a joint expatriate tax return with your non-US spouse on our blog.
You’ll want to carefully check the names and Social Security numbers of your dependents. You will need tax identification numbers for them, also. Don’t forget that you can claim your children under the age of 24 if they are enrolled in full-time school, regardless of the amount of income you earn and whether or not they live in your home. Children are often qualifiers for tax credits such as the Child Tax Credit, the Additional Child Tax Credit, Child and Dependent Care Credit. If attending college or university you may be able to claim the American Opportunity Credit, Lifetime Learning Credit, or even the Tuition and Fees Deduction.
Read through the remainder of the first page to make sure that everything makes sense. Do the wages reported on Line 7 make sense, or seem overstated? Is the interest from your foreign bank accounts reflected on Line 8? Did you sell stocks to prompt a capital gain on Line 13? Did your US expat tax preparer remember to take a deduction for the student loan interest you paid on Line 33?
At the bottom of the second page, verify the amounts that you have had withheld from your paychecks (if employed by a US business) or any estimated tax payments you made throughout the year. Together these are the amount of tax that you have already paid against your overall tax liability. If you paid in too much you are due a refund and may elect to have your refund direct deposited into your US bank account. Triple-check the routing and account numbers at the bottom of the second page so your refund is deposited into the proper account.
US Taxes – Schedule B
There are three critical questions on Schedule B that every taxpayer should really answer, especially the expat taxpayer. First, during the tax year did you have any financial interest in or signature authority over a foreign financial account? You may not have a requirement to file an FBAR (Report of Foreign Bank and Financial Accounts) however you may still check yes to this question. Second, it asks if you do have the annual FBAR Form 114 filing requirement if the aggregate of all your foreign financial accounts are over $10,000 during the tax year. The last question is whether or not you have any interest in a foreign trust.
US Taxes – Form 2555
The next most important form of your US taxes is Form 2555. This form is used to calculate your foreign earned income exclusion and foreign housing deduction, if eligible. The good news about the first page of this form is that it asks straightforward questions that are typically relatively easy to answer. Carefully read through the form to ensure that the questions have been answered accurately. If you have qualified as an expatriate under the Bona Fide Residence Test, make sure that Part II has been completed in its entirety and that the dates reported on Line 14 are accurate. If you have qualified under the Physical Presence Test, Part II can be skipped and Part III on the second page should be completed. Our blog has more information on these two types of tests regarding your expatriate tax return.
Part IV of Form 2555 will reflect how much of your total income is considered “foreign earned.” Most commonly wages and employee benefits are reported in Part IV. Passive income like interest, dividends, or rent do not qualify for the Foreign Earned Income Exclusion, as are a not ‘earned income’. Next on page 3 of the Form 2555 any housing exclusion or deduction is calculated in addition to the income exclusion. Read through Part VI to make sure the information is accurate and the amounts seem reasonable and truthful. Verify with your expat tax preparer that your Foreign Housing deduction rates have been adjusted for the country in which you’re residing. You can also verify the limitations for specific countries for your expatriate tax return on the IRS website.
It’s important to remember that Form 2555 is required for expatriates excluding foreign income from their US earnings. Some expats assume that because they expect all of their income to be excluded, filing an expatriate tax return is unnecessary. This is not true, it is not automatic! Income earned in a foreign country can only be excluded on your expatriate tax return if reported on a timely-filed Form 2555.
US Taxes – Form 2555-EZ
You may be able to file Form 2555-EZ for your US taxes in lieu of the more complex Form 2555. If you are not self-employed or intend to take the foreign housing exclusion, it is not an option. If your situation warrants the filing of Form 2555-EZ with your US taxes, review the direct questions asked on the form for accuracy and reasonableness.
US Taxes – Form 1116
Credits are dollar-for-dollar reductions of a tax liability. Taking advantage of all of the credits possible is the fastest way to reducing or eliminating your US expat tax liability. If you have paid income taxes to a foreign country, you can take a credit for those taxes on your US taxes via Form 1116. However, one important piece to remember: you cannot take a credit for the taxes paid on the foreign income that you have already excluded from your US wages, as shown on Form 2555. Nor can you take the foreign tax credit if you’ve taken advantage of the foreign housing exclusion. Our blog has more detailed information about taking advantage of the foreign tax credit on your expatriate tax return.
As with all forms for US taxes, double-check to make sure your name and Social Security number on the top of the form are correct. It is possible to have more than one Form 1116 attached to your tax return, depending on the type of income that was taxed in a foreign country. This particular form has a tendency to overwhelm some taxpayers, so review it for reasonableness and let your expatriate tax return preparer do the rest!
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Originally published in 2011; updated October 24, 2018.