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Expat Tax Essentials
For Americans living abroad, tax season can be complicated. On the plus side, you can generally claim a broader range of tax deductions and credits than most Americans. To help you understand your rights, we’ve compiled a list of some of the most common expat tax deductions.
Just like any US citizen, Americans living abroad can claim the standard deduction or choose to itemize their deductions. Let’s look at both options.
The standard deduction amount will depend on your filing status and age.
For 2022, the standard deductions are as follows:
When it comes to itemized deductions, there are seven categories you should be aware of:
Determining whether to opt for standard or itemized deductions is a complicated decision. You’ll want to be sure you are taking advantage of the most significant tax deduction available, and you also don’t want to spend unnecessary time putting together itemized deductions if the standard deduction is a better option for you.
Consult a qualified tax professional to review your options.
The Foreign Earned Income Exclusion (FEIE) is a deduction that allows you to exclude the first $112,000 (2022 tax year) of earned income. For income earned in 2023, this amount will increase to $120,000. To qualify for the FEIE, you must meet either the Bona Fide Residence Test or Physical Presence Test.
You could qualify as a Bona Fide Resident for purposes of the FEIE if you were a resident outside of the US for an uninterrupted period that included an entire calendar year.
Typically, in the year you relocate outside of the US, you will need to wait until the following year to be able to use the Bona Fide Residence Test. The IRS grants an extension to January 31st of the year following the regular due date of your tax return by filing Form 2350. This allows you to qualify for the Bona Fide Residence test while filing your tax return promptly.
To be considered a Bona Fide Resident of a non-US country, you:
(Typically, if you are subject to tax in your new location and file a tax return as a resident, you will qualify as a Bona Fide Resident.)
For example, let’s say that on February 1st, 2022, you moved from the US to Canada, where you established tax residency. You will be unable to use the 2022 calendar year to qualify for the Bona Fide Residence Test, as you were not a resident outside of the US for an uninterrupted calendar year. However, the IRS will grant you an extension to January 31st, 2024, to file your 2022 tax return so you can use the 2023 calendar year as your uninterrupted calendar year.
In this case, your FEIE for the 2022 tax year would be prorated based on the number of days you were a resident outside the US. February 1st–December 31st is 334 days, meaning your maximum exclusion under the FEIE would be $102,488 (334 / 365 x $112,000).
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!
You might qualify under the Physical Presence test for purposes of the FEIE if you spent at least 330 days outside of the US during any 365 periods that either started or ended in the tax year.
Using the same example above, let’s say you moved out of the US on February 1st, 2022. Then, if we add that you had 30 days of travel to the US from February 1st, 2022, to February 1st, 2023, you could use that as your qualifying period.
Like the Bona Fide Residence Test, your maximum exclusion is prorated based on the period for the calendar year. You can file Form 2350 to extend the due date of your tax return to January 31st of the year, following when your tax return would generally be due.
Earned income typically includes only salary or self-employment earnings. Unemployment earnings and passive income do not qualify for this exclusion.
For self-employed individuals who take expenses, the $112,000 limit is considered based on your gross income and is reduced in proportion to any expenses you take on the self-employed income.
Once you claim the FEIE on a tax return, you must continue using it on subsequent returns for which you qualify. Not claiming it in future tax years may disqualify you from taking it for 5 years or more.
Note: When using the Married Filing Joint filing status, the FEIE can be claimed by either or both spouses.
The Foreign Housing Exclusion is an addition to the FEIE, increasing the FEIE by the amount of qualified housing expenses that exceed the base amount.
That base amount is set annually and is related to the number of days you use to exclude your income under the FEIE. For an individual who lived the entire year outside of the US in 2022, the base amount is $17,920.
The most common qualifying housing expenses are:
Some common items that are not permitted to be excluded under the FHD are as follows:
The ceiling for the 2022 tax year is $15,680 (if you lived the entire year outside of the US). However, if you live in a high-cost area, you may be eligible for a higher ceiling. You can find the cities that qualify for a higher housing exclusion in the Form 2555 instructions.
If you work outside of the US and pay income tax in your local jurisdiction, you can also use the Foreign Tax Credit (FTC) to avoid paying tax on the same income twice.
If you use the FEIE as previously described, you cannot claim the FTC on the same income. If you exclude all your earnings because of the FEIE, you do not need to claim the FTC. However, certain cases may make more sense for you to claim the FTC than the FEIE (see Child Tax Credit below).
The FTC is a non-refundable tax credit which means that it can reduce your US taxes to $0, but the IRS will not refund you the excess credit. The excess amount is carried back one year and carried forward upwards of 10.
For example, let’s say you choose not to use the FEIE and earn $100,000. Let’s also say the US tax otherwise, due on this income would be $15,000. Finally, let’s say you paid the equivalent of $20,000 in foreign income tax. This means that the US would give you a credit of $15,000, and the remaining $5,000 would be either carried back one year or forward for upwards of 10 years.
The Child Tax Credit has both a non-refundable and a refundable element. Starting with the 2021 tax year, the refundable portion of the child tax credit is up to $3,600 per child (or $3,000 if the child is over the age of 6). This is only available to individuals with their primary abode in the US for over half of 2021.
If you live outside of the US for more than half of the year, you may still be able to obtain the refundable Child Tax Credit of up to $1,400 per dependent or the non-refundable amount of up to $2,000 if you did not claim the FEIE. However, you must have earned income to claim the refundable portion in this case.
To be eligible for the child tax credit, a child must meet all of the following requirements:
If you received an advance child tax credit from the IRS in 2021, you should be issued Letter 6419. The amount you were prepaid will reduce the amount of credit you can claim on your tax return.
Educators of children in elementary and secondary schools (kindergarten through 12th grade—or the overseas 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.
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) so that you could work or look for work, you might be able to take a credit for some of the expenses paid.
This credit is calculated on Form 2441. 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).
The recovery rebate credit is only available for the 2020 and 2021 tax years. (This is a credit for any amount of the Economic Impact Payments or Stimulus Relief Payments you were eligible for but didn’t receive when the US government originally issued them during the COVID-19 pandemic.)
Individual Retirement Accounts (IRAs) are generally used to plan your retirement. These are not employer-sponsored retirement plans (i.e., a 401k). There are two main streams when discussing IRAs: Roth IRAs and traditional IRAs. To make an IRA contribution, you must have earned income reported on your tax return. The limit you can contribute per taxpayer to an IRA in 2022 is $6500—unless you are over 50 years old, the limit is raised to $7,000.
A Roth IRA is a retirement account where your contributions grow tax-free. If the funds are left in the plan for at least 5 years, they are not subject to any tax or early withdrawal penalty on either the contribution or the earnings. The contributions are not deductible on your tax return are you can only contribute to a Roth if your modified adjusted gross income (MAGI) is less than the following amounts based on your filing status:
If you cannot contribute to a Roth IRA or wish to deduct your contribution, you may consider a Traditional IRA. A traditional IRA can either be deductible or non-deductible. You make the election to deduct your Traditional IRA contribution when you file your tax return.
If you deduct your contribution, then upon withdrawal, the funds the total amount is included in your income for that year. If you decide not to deduct your contribution, then upon withdrawal, only the earnings portion is taxed.
Essentially, if your US tax in the year the contribution is made is lower than the US tax you expect to have at retirement, then it does not make sense to deduct the contribution.
If you withdraw your contributions before you reach 59.5 years old, you may be subject to a 10% early withdrawal penalty.
While not precisely an expat tax deduction, a tax treaty can help Americans avoid double taxation while living abroad. When living in a country with a tax treaty in place, that treaty will define whether the US or your host country has jurisdiction to tax a given source of income. (Typically, you will pay taxes to whichever country you reside in for most of the tax year.)
To learn if your host country has a tax treaty with the US, check out this list from the IRS.
Totalization agreements are treaty-like agreements between the US and another country’s social security system. These 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 taxpayers’ self-employment taxes, which are the social security and Medicare payments for the self-employed income. This is done by informing the IRS that the self-employment taxes are being paid to the resident country instead of the US. Self-employed taxes can amount to 15% or more of the net income of 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.
To learn if your host country has a tax treaty with the US, check out this list from the Social Security Administration.
While this is not a comprehensive list of expat tax deductions and credits, we hope it gives you a better understanding of how you can reduce your US expat taxes. If you have any additional questions, we’d be happy to answer them!
At Greenback Expat Tax Services, we specialize in helping expats manage their US tax obligations. Contact us, and we can review your specific situation and guide you through which US expat tax deductions and credits can save you the most money. In fact, we can prepare and file your expat taxes on your behalf.