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HomeTravelMigration10 Essential Expat Tax Tips for Americans

10 Essential Expat Tax Tips for Americans

Photo by Nataliya Vaitkevich from Pexels

Living and working overseas comes with many perks. You get to see new sights, meet different people, and in most cases, enjoy a lower cost of living. However, just because you’re an American abroad doesn’t mean you’re out of Uncle Sam’s clutches.

Here are a few things every American expat needs to know about their tax obligations to the homeland, plus tips for preparing your tax return and reducing your tax bill.

You have to file a U.S. federal tax return even if you are based abroad

While most countries have adopted residency-based taxation, the United States uses a citizenship-based tax system. This means that all American citizens and permanent residents (more commonly known as Green Card holders) have to pay U.S. taxes and file a federal tax return, even if they live and work in a foreign country.

Under the U.S. tax code, your worldwide income is subject to U.S. taxation regardless of whether your earnings are derived from an American company or a foreign entity. Rules get trickier for American business owners abroad: Your business income, even if it’s solely earned abroad, may be subject to U.S. federal income taxes.

Obviously, this can lead to a lot of tax headaches. If you want to clarify your tax situation, your best option is to talk to a tax service such as TFX (Taxes For Expats).

You may need to pay U.S. state taxes

You may be liable for state taxes even if you are abroad. But it all depends on your home state, as the rules differ from state to state. Some states don’t have a state income tax, while others require residents to file a yearly state tax return, even if they are not currently within its borders.

It’s important that you double-check your state tax obligations before leaving the country to avoid a hefty tax bill when you return. Please note that federal tax rules are different from state tax rules. 

If you’re preparing for a long-term stay abroad, your best option may be to establish residency in a state with low or no state income tax. If you’re not sure about your tax situation, talk to an expert.

Don’t forget your self-employment taxes

If you are self-employed, you are still required to pay self-employment taxes even if you live and work abroad. Self-employment taxes comprise your Medicare and Social Security contributions. It’s important to note that self-employment taxes cannot be offset by any tax benefits available to you.

Track the time you spend abroad

American expats face a unique tax conundrum: In many cases, they are subject to double taxation from Uncle Sam and their host country. But it all depends on how much time you spend in one place.

Make sure to check your host country’s tax laws before putting down roots. Your length of stay could determine your tax residency in that country. Generally, you become a foreign tax resident after spending a certain amount of time and your income may be subject to foreign income tax.

While American expats can avail of tax benefits to reduce their U.S. tax liability, you need to be outside of U.S. territory for a certain amount of time, also known as the Physical Presence Test. Meeting this test is important if you want to maximize your tax benefits.

It’s important that you keep track of your time spent abroad. As a general rule, you need to spend a total of 330 days abroad during a 12-month period. Even coming up a day short of the minimum requirement means you forfeit any expat tax benefits that may help lower your tax bill.

Get to know the Foreign Earned Income Exclusion

One way to reduce your tax bill is to use the Foreign Earned Income Exclusion (FEIE).

The FEIE allows expat taxpayers to exclude a certain amount of foreign earnings from federal income tax. For tax year 2021, the FEIE threshold is $108,700. For tax year 2022, the threshold is $112,000. You will need to file a federal tax return even if your income falls below the threshold and you have zeroed out your tax liabilities.

To claim the FEIE, you must meet the Physical Presence Test.

Offset your foreign expat taxes

Expats who have paid foreign income tax can claim an equivalent credit to reduce their U.S. tax bill. This benefit is known as the Foreign Tax Credit (FTC).

Let’s say you paid $500 of income tax to the tax service of your host country. You can take a tax credit to lower your U.S. tax bill by the same amount.

However, you cannot take a tax credit for taxes on excluded income once you have claimed the FEIE. But you may apply the FTC on foreign-earned income over the threshold.

Claim the Child Tax Credit

If you have dependents under the age of 12, you can claim a Child Tax Credit, also known as the Child and Dependent Care Credit, to lower your tax bills. Make sure your dependents have a valid U.S. Social Security Number (SSN) before claiming the Child Tax Credit.

Know your tax forms and deadlines

Use Form 1040, also known as the U.S. Individual Income Tax Return, when paying federal taxes on income over $10,000 (or $400 if you’re self-employed)

While the regular tax deadline for the 2021 tax return is April 18th, American taxpayers abroad are automatically granted a filing extension until June 15th, with an option for a second extension on October 17th. To secure an additional extension, file a Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, before June 15th.

Report foreign assets and accounts

If you own financial accounts held in a foreign bank or brokerage with a combined worth of $10,000 and above, you will need to file an FBAR, Report of Foreign Bank and Financial Accounts.

Use Form 8938, Statement of Specified Foreign Financial Assets, to declare foreign financial assets with a total value of at least $200,000. Please note that you do not need to report your primary residence owned in your name.

Filing taxes while working abroad

One of the downsides of living abroad is dealing with a potentially complicated tax situation. If you’re not careful, you may be faced with a hefty tax bill. If you have any questions about your taxes as an American expat, you might want to contact a tax expert. 

TFX (Taxes for Expats) has been a preferred tax partner for Americans abroad for over 25 years. Our team of specialists will help you clarify your situation and solve your tax woes. Most importantly, you will never have to worry about mistakes on your forms.

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