When it comes to US expat taxes, if you are living abroad, the rules are a little different. Expats that work or live in another country may find it difficult to understand US tax code on their own without the assistance of an expat tax accountant. When US expat taxes are strategically prepared correctly, there are huge benefits intended exclusively for the expat. However, when filing taxes from abroad, you should keep some things in mind. From tax breaks, deadlines and extensions, and other important US expat taxes-related issues, we hope this article addresses your questions.
Expat Tax Deadlines And Extensions
Expat tax deadlines are similar to deadlines for individuals living in the United States. US taxpayers living outside the United States on the tax deadline of April 15, receive an automatic extension until June 15 to file. Due to the exceptional circumstances of Covid-19, this year, the deadline to file tax returns was extended to July 15, 2020. Thus, expats had time to file and pay until July 15, 2020.
If you need additional time you can apply for an extension until October 15th by using Form 4868, but penalties and interests will be applied. Anyone filing a 2019 federal tax return is eligible for the extension, whether that includes taxpayers, corporations, estates, trusts, unincorporated business entities, and estates.
Expat Must File Taxes If They Have Income
If your income worldwide exceeds the filing threshold, you must file your tax return every year. Income consists of wages, interest, dividends, and rental income. For self-employed individuals, the threshold is $400, notwithstanding your filing status. Also, if you are eligible for some credits and refunds, you should file even if you are not required to do so. There are other special situations subject to filing requirements.
You May Amend Your Income Tax Return
Some people may have made a mistake in their income tax return. If you are one of those, do not worry, you can make things right by filing an amended return with Form 1040X. Maybe you missed a tax break or need to correct an error that may increase your tax. In such scenarios, filing an amendment before the IRS may be the best option as the penalties are often much less. Amended returns must be filed before a certain date if you are seeking a credit or a refund.
Most Expats Do Not Owe Taxes
Thanks to important deductions, exclusions, and credits, most expats can offset their foreign earned income with Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE). There is no need for you to pay tax on your income twice. You can claim your FTC against income tax that has been taxed in your present country. For the exclusions, you must qualify as an official expat and have earned income abroad to prove your eligibility to receive these benefits.
Lower Your Expat Taxes With FEIE And FTC
The FEIE allows expats to avoid double taxation on a portion of their income. Keep in mind, the United States will tax income you have earned worldwide unless you apply for a Foreign Earned Income Exclusion. Once you apply for your FEIE, it remains in effect for each year. But if you decide you no longer want this exclusion, you cannot claim the exclusion until approved by the IRS.
Expats may worry they don’t qualify for the Foreign Earned Income Exclusion (FEIE) and miss out on substantial expatriate tax benefits. Also, if you moved outside the US during the latter part of the year, and worry about qualifying for the Foreign Earned Income Exclusion (FEIE), an extension is available until October 15th or you may file Form 2350.
The Foreign Tax Credit (FTC) can also help you eliminate or offset US tax liability. This is a dollar-for-dollar credit. To elect it, you file form 1116. Taxpayers may be eligible for both, the FEIE and the FTC.
You Cannot Use The Foreign Tax Credit (FTC) On Excluded Income
If you excluded some of your income with the Foreign Earned Income Exclusion (FEIE), you are not able to use the Foreign Tax Credit (FTC) on that income. If you cannot claim the full amount of foreign income taxes, you may carry this amount for the next 10 years and even to previous years.
To Use the FEIE You Must First Pass A Residency Test
There is the Physical Presence Test, which requires you are physically present in a foreign country 330 to 365 days. The Bona Fide Residency Test requires you to live overseas for at least one year with no intention of moving back to the United States any time soon. In other words, temporary contractors, or individuals on assignment will not qualify.
Tax Treaties May Prevent Double Taxation
The United States currently has tax treaties with 68 countries. Tax breaks will vary by country, so expats should review the treaty with their host country in order to figure out how they will be taxed. But tax treaties can be complex so make sure to consult an accountant if you are not sure about the rules that apply to your specific case.
Including Children On Your Tax Return
The Child Tax Credit can be beneficial if you have dependent United States children, whether permanent residents or citizens, which may result in a refund. To qualify as a dependent, children must have a US Social Security Number. While the Child Tax Credit can be beneficial, since your children will be considered US individuals, they will be taxed moving forward unless they renounce their citizenship once they become adults.
You Must File FBAR When Foreign Bank Account Threshold
The FBAR (Foreign Bank Account Report) or FinCEN form 114 must be filed if your foreign bank accounts exceed $10,000. You file this form separately from your expatriate tax return. When it comes to foreign bank accounts, investments and pensions are part of it as together with accounts that you may not own but have signature authority over it. The FBAR deadline falls on Tax Day with an automatic extension to October 15th.
You May Have To File FATCA
The Foreign Account Tax Compliance Act (FATCA) is similar to FBAR since they both prevent taxpayers from hiding money or assets in offshore accounts. The threshold varies by residency and filing status. Form 8938 is filed should you exceed the filing threshold.
Remove Or Reduce Penalties With The IRS
Some expats may fear strict tax deadlines and get caught up on delinquent returns. Thankfully, the IRS has implemented some programs such as the IRS Streamlined Offshore Filing Procedures and the Streamlined Domestic Offshore Procedures to either remove or reduce these penalties. These programs are great for expats unaware of their tax obligations.
If You Renounce Citizenship You May Not Avoid US Taxes Some expats may want to renounce citizenship to alleviate US tax burdens. If you are considering this, you must prove compliance on US taxes for 5 years before you renounce.
Based on your income level, you may be subject to an exit tax once you renounce. This is the IRS way of making sure you do not renounce your citizenship only on the basis of tax debt.
Social Security Benefits May Be Taxable
You can collect your social security benefits in any country in which you choose to live. Some benefits are taxable while others are not. Your Social Security benefits are reported as income on your expat tax return USA. Only 85% of these benefits are considered taxable income.
The United States has agreements with 26 countries that show which countries you can receive your Social Security payments from. This is important since without such agreements you may be forced to pay in two systems.
Income Earned In The US Is taxable
If you earned some income on US soil, you cannot exclude it from US taxes with the FEIE. The exception is if you have to pay taxes on that income to another country. In the latter case, you may use the FEIE to offset the United States taxes you owe.
Reporting Your Rental Income
All rental income must be reported to the IRS. However, property-related expenses may offset tax liability. Repairs to your property can be reported right away but improvements may take longer. Repairs are meant to restore the property to its original state while improvements will increase its value.
File Your State Tax Return
The rules of every state may differ in terms of a permanent place of abode or domicile in order to best determine residency. Check with your state to find out whether you need to file a state tax return or not.
Covid-19 Tax Updates
- If you came back to the United States due to the pandemic but had planned to stay overseas, you can still claim your FEIE.
- Americans living abroad are also eligible to receive Covid-19 stimulus payments with direct deposit or US bank account being the best method to receive it. You must have filed your 2018- or 2019 income tax to qualify.
- Tax filings and payments are due on July 15 for all Americans living abroad.
- If you are owed a refund file early to receive your refund in as little as 21 days.
- Tax credits and loans help small business compensate for the economic impact of Covid-19.
Expat Tax Help
If you need to request expat tax help from an expat tax accountant, look no further than My CPA, PA. We are here to provide the answers and support you need. Contact us and we will get you started immediately. Our accountants have experience with US expat taxes. Our experience includes deductions, exclusions, and credits that will help save money on your expatriate taxes.
Covid-19 Preparedness – Safety Comes First
We protect our employees and clients by following recommendations by the Centers for Disease Control (CDC). We comply with current public health guidelines, and make sure to stay up to date on the latest guidance.
Information Only / No Legal Advice Intended
This publication is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or another advisor regarding your specific situation.
To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Always seek advice based on your particular circumstances from an independent advisor. Any disclosure, copying, or distribution of this material, or the taking of any action based on it, is strictly prohibited.