Income tax for expats is straightforward, but it can seem complicated. In this post, we share 6 things you should know to help you understand what the IRS expects from you.
Paying tax for expats is intimidating if you don’t know how it affects you. The good news is that you probably don’t have to worry because most Americans don’t owe U.S. tax when they live in another country. This is because the government has put in place important tax credits, tax deductions, and tax exclusions. The government took these steps to make sure your income isn’t taxed twice.
There are other important things you should know about tax for expats which we’ll look at in this post.
Tax for Expats – 6 Things you Should Know
1. How to Qualify for Exclusions
To qualify for benefits, such as the foreign tax credit, you must qualify as a legal expat, earn foreign income, and file your income tax for expats.
2. Tax for Expats – Income, Credits, and Special Situations
If your global income is higher than the filing threshold, you have to file an American Federal Tax Return every year. It’s important to note that the filing threshold for tax for expats varies from state to state.
3. Tax for Expats - What’s Included in Your Income
The following is considered income: Your wages and salary from American and non-American sources, interest, rental income, dividends, etc. If you’re self employed, the income threshold is $400. If you’re eligible for certain refunds and credits, you should file even if tax for expats doesn’t apply. Certain situations, such as owing special taxes, could subject you to having to file.
4. Tax for Expats – When to File Your Return
As an expat, you’re automatically given a filing extension to June 15 if you’re living outside the country on the deadline of April 17. But if you owe taxes, penalties and interest begin on April 17, so it’s best to pay your tax for expats by this deadline. Tax for expats deductions and exclusions might be available to you if you return to the U.S., but you’ll have to file your taxes by the 17th of April because you’re, once again, an American resident.
5. Income Tax for Expats and The Foreign Tax Credit
If your income exceeds the Foreign Earned Income Exclusion, or if you’re living in a country with high taxes, the tax for expats Foreign Tax Credit might help eliminate or offset U.S. tax liability. This tax credit is a dollar-for-dollar credit on taxes you owe to the foreign country you live in.
There are other ways to lower income tax owed, but they get a little tricky. If your situation is like the above scenarios, you should get help from a tax for expats expert.
6. Wanting to use the Foreign Earned Income Exclusion
To qualify for this exclusion, you must pass the residency test. There’s a Physical Presence Test – it requires that you’re physically present in the foreign country for 330 of any 365-day period. Under the Bona Fide Residency Test, you have to live overseas for at least one calendar year with no intention to move back to the States in the near future. Under the Bona Fide Residency Test, you must have lived overseas for at least one calendar year and have no immediate intention of moving back to the US – so temporary overseas contractors and those on assignment won’t qualify for the tax for expats exclusion.
Esquire Group, a boutique international tax advisory firm specializing in tax consulting, tax planning and compliance and helping corporate and individual taxpayers with Offshore Voluntary Disclosure Program, asset protection, and tax consulting for US expats. To learn more about us, visit www.EsquireGroup.com/about.