Check you qualify as an expatYou might be wondering what we mean, but this is by far one of the easiest ways to get caught out. Qualification via the Physical Presence test requires you to be physically present in a foreign country for a full 330 days. Travelling time does not count and so make sure to keep track of your dates and times. A simple calculation error could cost you thousands.
Most American expats don’t owe taxesNo, we haven’t gone mad. To prevent paying tax twice on your income, the US has put in place several exclusions and credit schemes to ensure taxation is fair. If you’re already paying tax by your host country, you may be able to claim Foriegn Tax Credit against your income.
Most expats are able to offset all of their foreign earned income providing they file a tax return to prove eligibility for the following:
– Foreign Tax Credit
– Foreign Earned Income Exclusion
– Foreign Housing Exclusion
Lower your US taxes using Foreign Tax CreditIf your income exceeds the Foreign Earned Income Exclusion ($105,900 in 2019), you may be able to use Foreign Tax Credit to offset of eliminate your tax liability. To make use of Foreign Tax Credit you might file Form 1116.
Excluded income cannot be offsetYou can’t use Foreign Tax Credit on any income you have excluded using Foreign Earned Income Exclusion (FEIE). If you’ve not claimed your full allowance you can sometimes carry this forward or back to previous years.
You need to apply for Foreign Earned Income ExclusionIf you qualify for Foreign Earned Income Exclusion (FEIE) you must also elect it by filing form 2555 or 2555-EZ. Once you’re signed up, you will need to include it on your tax return each year thereafter.
If you decide you no longer want to use FEIE, you will not be able to claim the exclusion again for another 5 years without prior approval from the IRS.
You must file if you have income or creditsYou must file a US federal tax return each year if your worldwide income exceeds the filing threshold.
Your worldwide income can include any of the following sources:
– All wages/salaries
– Rental Income
Expats receive an automatic filing extension until June 15thExpats and US taxpayers living outside the US receive a filing extension until June 15th on the tax deadline of April 17th. It’s important to note however that any US taxes owed are due by April 17th to avoid penalties and interest.
Returning expats may be eligible for some exclusions and deductions, but they will still need to file by April 17th.
Tax returns can be amended if you make a mistakeAmended returns for a given tax year can be filed using form 1040X. It is always advisable to file an amended return before the IRS spots a mistake.
You can apply for an extension if you need more timeIf you’re worried that you won’t qualify for the Foreign Earned Income Exclusion (FEIE) because you moved towards the end of the year, you don’t need to miss out on the tax benefits. If you qualify, you may be able to apply for an extension until October 15th or file using from form 2350 for even more time.
The FBAR Deadline Now Falls on Tax DayThe FBAR deadline is April 17th with an automatic extension to October 15th. FBAR is filed separately from your regular income tax return.
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