Filing returns as an expat is a complex task, considering you must comply with regulations in your home country and the host country where you currently reside. Not declaring income as stated by taxation laws and missing out on paying the applicable dues can earn you penalties, fines and even jail terms. All of this can be avoided by relying on the expertise of a tax consultant for U.S. expats and following their advice. Read ahead for an overview of how expat taxes work.
Yes, You Read that Right! You’ll Continue to File Returns with the U.S. IRS
Most expats are unaware that regardless of where they live and work, they are required to file returns with the IRS just as they did while they were living in the U.S. If you retain American citizenship or a Green Card, you’re liable to pay taxes to the U.S. government by filing Form 1040. You must declare income earned from all worldwide sources in the returns, regardless of whether the aggregate income falls within the taxable bracket. Since you must also file returns in your adopted country within the predetermined deadlines, it is always advisable to have a professional assist you with the task.
Let’s Understand Filing Deadlines
The American financial year extends from Jan. 1 to Dec. 31, following the usual calendar year. Residents and citizens must file returns and pay applicable taxes by April 15 of the next year. The IRS makes allowances for expats and permits them a two-month extension up to June 15. However, you must pay estimated taxes before this date, or you could incur penalties and fines for late payment.
In case you’re unable to file returns by this date, you can request a further extension up to Oct. 15 by completing and submitting Form 4868. This provision is helpful for expats who live in nations with different financial years and must calculate their income according to distinct timelines. For instance, the fiscal year in the U.K. runs from April 6 to April 5 in the following year.
You’ll Take Advantage of Exclusions
The U.S. IRS has several provisions that enable expats to avoid paying taxes on the same income to two different countries. Your tax consultant will direct you on the exclusions you can avail of and the particular exclusions that will save you the maximum tax. Here’s a quick look at some of them:
Foreign Earned Income Exclusion (FEIE)
Each year the IRS sets an income limit, which is $112,000 for 2022. Expats can deduct this amount from their gross income and pay taxes only on the amount remaining. For instance, if you earn a total of $115,000, you’re liable to pay taxes only on $3,000. To qualify for this allowance, you must prove that you’re a permanent resident of another country and have lived in the U.S. for only 35 days in an entire year. Keep in mind that the FEIE only applies to income actually earned. You cannot claim exclusions for rental income, interest on investment products, retirement funds and any other passive income.
Foreign Tax Credit (FTC)
Expats can claim a credit for the taxes they pay to their host country in their IRS returns dollar for dollar. If you don’t claim the credit in a particular year, it can be carried forward to the ensuing years. However, expats are permitted to avail of the FEIE or FTC on a specific income in a given year. You can claim both exclusions on incomes from different sources in a single year. When working out whether to claim the FTC, you’ll compare tax rates in the U.S. and your host country. If the rates are higher in the U.S., availing of the FEIE is more advantageous and vice versa.
Foreign Housing Exclusion (FHE)
This provision permits expats to deduct their rent and other living expenses from their income before paying taxes on the balance through the Foreign Housing Exclusion. The exact amount is calculated according to the number of family members living with you. Typically, the exclusion ensures a decent standard of living, and you can deduct expenses like food, clothing, personal needs, rent, parking rental, leasing furniture and repairs. You can also include costs like homeowner’s insurance and utilities other than the internet, phone and cable TV.
Filing the Foreign Bank Account Report (FBAR)
If you have bank accounts or any other investment accounts in the foreign country, and at any time, you have a total balance of more than $10,000, you must file the FBAR with the IRS. Even if the account is not registered in your name, but you are an authorized signatory, you’re liable to file the FBAR.
Make sure to factor in these tips when filing your returns and stay compliant with the rules.