U.S. Expat Income Tax Returns
Expats can take advantage of significant tax benefits, when knowing what tax requirements apply to them.
Over 8 million Americans commonly known as digital nomads live abroad. There are tens of thousands who have missed filing or have never filed their U.S. tax returns. This happens more frequently than you might think.
What can you do to get current? In cases where a person is over the minimum income threshold, which would require them to file a U.S. tax return, the U.S. taxpayer should look into the IRS’s “Streamlined Foreign Offshore Procedures” to get current.
The IRS is aware that U.S. taxpayers living abroad continue to earn income, whether in the country they reside, or working remotely. Over the last 10 years well over 50 countries have signed agreements with the U.S. to exchange banking and other pertinent financial information about Americans living abroad.
The IRS started opening remote field offices overseas with ‘boots on the ground’ in areas where large numbers of Americans live. Foreign tax authorities are intensifying their cooperation with the U.S. Treasury and IRS. Don’t create a ‘red flag’ by not filing.
And if you need more time to file, you receive and automatic extension until June 15th, but must pay what you owe by April 15th to avoid interest charges. Remember to file for an extension if you need more time.
Over 8 million Americans commonly known as digital nomads live abroad. There are tens of thousands who have missed filing or have never filed their U.S. tax returns. This happens more frequently than you might think.
What can you do to get current? In cases where a person is over the minimum income threshold, which would require them to file a U.S. tax return, the U.S. taxpayer should look into the IRS’s “Streamlined Foreign Offshore Procedures” to get current.
The IRS is aware that U.S. taxpayers living abroad continue to earn income, whether in the country they reside, or working remotely. Over the last 10 years well over 50 countries have signed agreements with the U.S. to exchange banking and other pertinent financial information about Americans living abroad.
The IRS started opening remote field offices overseas with ‘boots on the ground’ in areas where large numbers of Americans live. Foreign tax authorities are intensifying their cooperation with the U.S. Treasury and IRS. Don’t create a ‘red flag’ by not filing.
And if you need more time to file, you receive and automatic extension until June 15th, but must pay what you owe by April 15th to avoid interest charges. Remember to file for an extension if you need more time.
Should you amend a prior tax return?
You should amend a prior tax return if you made mistakes using Form 1040X. It is better to file an amended return because the penalties imposed by the IRS are usually less if done before the IRS finds the error.
Did you know that the U.S. tax code contains provisions that allow expats to exclude their foreign income?
If you qualify, you can reduce your U.S. tax obligations using either the "Foreign Earned Income Exclusion (FEIE)" or the "Foreign Tax Credit (FTC)." Yes, even if you are a permanent U.S. resident or an American citizen living abroad, your overseas income is subject to U.S. federal income tax and possible state filings. But you may be able to claim special foreign earned income and foreign tax credits and even certain expat tax relief benefits as well.
The Foreign Earned Income Exclusion (FEIE, IRS Form 2555) allows taxpayers to exclude part of their foreign income on their U.S. tax return.
If you live in a high-tax country or your income exceeds the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit (FTC, IRS Form 1116) may help you offset or eliminate your US tax liability.
The FTC is a dollar-for-dollar credit on the taxes you pay to a foreign country. You must file Form 1116 to elect it.
Can I use the Foreign Tax Credit, on income I excluded by using the FEIE?
Beware of "double dipping"
Many taxpayers are eligible for both the Foreign Tax Credit and the Foreign Earned Income Exclusion. If you excluded income with the Foreign Earned Income Exclusion (FEIE), you cannot use the Foreign Tax Credit (FTC) on that excluded income. You can only offset the taxes you pay on income you do not exclude. The IRS will look at this as “double-dipping”.
Carry-Overs
If you do not take the full amount of foreign income taxes you paid or accrued, you can carry these over for the next 10 years, or to the prior year.
Use the Foreign Earned Income Exclusion form to reduce or eliminate U.S. taxes.
The Foreign Earned Income Exclusion (FEIE) is the most common way expats reduce or eliminate their U.S. tax liability. You might be able to exclude housing expenses, rent and utilities, using the Foreign Housing Exclusion as well.
To use the Foreign Earned Income Exclusion (FEIE) you must both quality, and you must file Form 2555 or 2555-EZ.
If you use the Foreign Earned Income Exclusion (FEIE), it is then filed each year thereafter. When you no longer want to use it, you cannot claim the exclusion for the next five tax years without the approval of the IRS.
Income Tax Return Preparation - Ways to Get the Most Out of Your Prepared Tax Year
Even when you do not owe any U.S. taxes, it is still the preferred option to file. Because if in the future should you need to file, then a ‘gap in years’ could flag your return even though what you did is perfectly legal and allowed by the tax code and the IRS might reach out to you.
This is more of a “preventive” suggestion, to stay “under the radar.” Keep in mind that even if you do not need to file, you should check that you do not need to file annual FBAR’s.
If you live outside the U.S., an income tax return should be considered one of the more important things you should do each year. Always keep copies of your recent U.S. tax return and keep track of the IRS filing deadlines.
Remember that the IRS is the agency responsible for collecting your taxes. They have several methods of collection, but usually try to work with you first before they start pursuing alternative actions.
Before you file your income tax return, make sure you know what you want. Otherwise, you could end up with a large financial hardship, especially if the IRS decides you owe more money.
Advanced tax preparation is one of the best ways to ensure that you file your income tax returns on time. Waiting until the last minute can result in undue pressure, sleepless nights, costly mistakes and the IRS reaching out to you.