Understanding Tax for Expats

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If you have moved to another country or are planning to move to another country, you know that the monumental number of things you have to deal with can be overwhelming. Sometimes overlooked is the tax for expats, which allows the IRS to tax any U.S. citizen for life or Resident Alien (Green Card Holder) within the last 10 years. If you renunciate or lose your citizenship, you can still be taxed for up to 10 years.

What Do I Need to Submit?

When you are filing tax for expats, there are a few things you should file, but it’s always recommended, whether you are living in the country or international, that you file your income tax no matter what. It becomes mandatory for you to file taxes once your worldwide income exceeds a certain threshold, which varies by filing status.

For tax for expats purposes, income includes:

  • Wages and salary from US and non-US sources
  • Interest
  • Dividends
  • Rental incomes

Along with your normal filings, for tax for expats, you will be required to submit an FBAR, Foreign Bank Account Report (FinCEN form 114), if the total balances in all your worldwide bank accounts exceeds $10,000 (including investments, pensions, and signatory authority accounts). Even if your accounts exceed by $10,000 or by $1 for only one day, or even one minute, you must file an FBAR. As well, if certain financial assets exceed filing thresholds, you will be required to submit a Foreign Account Tax Compliance Act (FATCA) IRS Form 8938. FBAR and FATCA are similar filings, but they are separate, and you may be required to file either, both, or neither.

How Can I Reduce How Much I Owe?

When you file your tax for expats, there are many different credits and exclusions you can take advantage of. Foreign Earned income Exclusion (FEIE IRS Form 2555) allows you to exclude a certain amount of income from US taxation: $102,100 for the 2017 tax year, which reduces the total earned income that will be taxed by the US. If you use the FEIE, you cannot exclude incomes such as pensions, interest, capital gains, and US-sources incomes. A physical presence test must be passed in order to quality for the FEIE, which requires you to prove that you have been inside a foreign country for 330 of any 365-day period.

Foreign Housing Exclusion allows you to reduce your tax for expats amount by excluding housing expenses, such as utilities and rent.

The Foreign Tax Credit (IRS Form 1116) allows you to subtract the tax for expats on an income that is already taxed by a foreign country, as long as it is not already excluded by the FEIE.

The Child Tax Credit is also available if you have dependent US children that have US Social Security numbers. However, any dependent child you apply for a tax for expats credit for will be considered US persons and will have tax obligations for life as an adult.

Does Expat Tax Affect My Social Security?

If you have plans on retiring and living abroad, you can rest easy when you do your tax for expats knowing that you can still receive Social Security benefits. If you happen to live in a country in which you cannot receive benefits, you can still receive any US Social Security payments you missed if you move to a country that you can receive them in. Your benefits may be taxed, so you should remove them as income on your tax return, especially if you have other income. If they do get taxed, it will only be 85% of your benefits that will be considered taxable. There are totalization agreements with 26 countries to determine which country you will pay Social Security taxes to. You will be able to earn credits in one country and use them for calculations of benefits in another, thus you don’t have to pay into two systems and will only receive a single benefit.

When Do I Have to Submit My Taxes?

When you submit your tax for expats, the due date will be the same as it is for someone who is living within the US. However, you will receive an automatic two-month extension, but any US taxes owed are still due by the original date if you want to avoid penalties and interest. If at any point you move back to the US, your tax deadline will be the normal deadline date, but you may still be eligible for any expat tax deductions and exclusions for that year.

What if I Make a Mistake?

If you make a mistake with your tax for expats, you can amend previous returns using a 1040X form as soon as possible to avoid penalties. If you missed previous years, you can use the Streamlined Domestic Offshore Procedures to get your taxes compliant again.

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