Expat Tax Planning Guide
Planning and preparing your annual tax return is already stressful enough. But what happens when you move overseas? How can you plan your taxes as an American expatriate?
Tax planning is a process that involves reviewing your tax filing requirements and looking into how you can best lower your tax liability while remaining within the confines of the law. For expats, this process can be even more complex, especially when considering the intricate international information returns expats must file as well as the tax credits they are eligible for. Our tax accountants can confirm your residency in a foreign country, explain reporting and tax thresholds as they pertain to you as an expat, and prepare your taxes so that you do not face penalties from the IRS while living overseas.
To get the assistance you need during tax season, call the tax accountants for American expatriates at US Tax Help at (541) 362-9127.
Tax Planning Guide for Expats
Tax planning can be complicated for anyone, especially for expats. With help from our tax accountants for American expatriates, you can plan and prepare your U.S. taxes in a few simple steps while living abroad. Start by learning about your filing requirements and how to use special exclusions and credits to your benefit. Then, make sure you have properly established your residency in a foreign country and heed all reporting deadlines set by the IRS.
Reviewing Your Filing Requirements
Expats can begin tax preparation by knowing their filing requirements. Even if you are an expatriate living in another country, you must report your worldwide income to the IRS annually. On top of filing your tax return, you might also have to submit international information returns, such as Form 8938 and a Report of Foreign Bank and Financial Accounts (FBAR). FBARs can be sent to the Financial Crimes Enforcement Network directly using its online portal. You will have an FBAR reporting liability if you have more than $10,000 across all of your foreign bank and financial accounts.
Form 8938 is for expats and others to report their foreign financial assets. Expats filing alone must submit Form 8938 if they have more than $200,000 in foreign financial assets on the last day of the tax year or more than $300,000 in foreign financial assets at any time during the tax year. For expats filing joint returns, the reporting thresholds are doubled. Our tax CPAs can inform you of any additional forms, schedules, or information returns you must file while living overseas. It is important to remember that your tax reporting liability will not disappear when you move abroad as an American citizen.
Using Special Exclusions and Credits
The IRS provides several exclusions that are specifically for expats. The first perk is the foreign earned income exclusion. By claiming this exclusion, you can eliminate a substantial portion of your foreign earned income from taxation by the IRS. In 2023, the maximum exclusion is $120,000 per person. Depending on your income, you might be able to exclude your entire income from taxation by the United States. If you still earn income from an American source while living overseas, you cannot exclude that income from taxation by the IRS. Included in the foreign earned income exclusion is the foreign housing exclusion. You can claim both the foreign earned income exclusion and the foreign housing exclusion using IRS Form 2555. Attach this form to your annual tax return.
Expats should also plan to use the foreign tax credit. This prevents instances of double taxation. By claiming the foreign tax credit, you can offset your U.S. taxes with taxes paid to your foreign country of residence. For example, if you owe the IRS $2,000 in taxes and paid $1,500 in taxes to your foreign country of residence, you will only owe the IRS $500. Using the foreign tax credit might eliminate your tax liability to the IRS in its entirety. You can claim the foreign tax credit by filing Form 1116 with the IRS. There might be other exclusions you are eligible for as an expatriate that can also reduce your tax liability.
Establishing Your Foreign Residency
In order to confirm your filing requirements and your eligibility for special exclusions and credits for expats, you must establish your residency in a foreign country. Expats can do this by passing the bona fide residence test or the physical presence test. Passing the bona fide residence test requires expats to be residents of foreign countries for an uninterrupted period that includes a whole tax year. To pass the physical presence test, you must be physically present in a foreign country for at least 330 days during a one-year period. The IRS will determine foreign residency by looking at a few things, such as your foreign earned income and whether or not you have paid taxes to a foreign country. If you do not pass either residency test, you cannot claim expat-specific exclusions.
Preparing for Filing Deadlines
During tax planning, expatriates need to be aware of the filing guidelines they might face. Generally speaking, all expat tax forms, including forms for special exclusions or tax credits, are due on Tax Day. You can attach these forms and other schedules to tax return. That said, there is an automatic two-month extension for expats who fail to file on time. However, if you owe taxes to the IRS, interest will accrue during those two months that your taxes remain unpaid. Expats can also apply for a six-month extension from Tax Day. Although filing extensions might be available, it is best to submit all of your tax forms by Tax Day. This can eliminate any issues with late filing that might result in unintended consequences for expatriates. Our tax CPAs can plan and prepare your taxes so that they are filed on time and without any additional stress or work on your behalf.
Call Our Tax CPAs to Discuss Your US Taxes
Call our tax accountants for American expatriates at (541) 362-9127 to speak with the team at US Tax Help today.