Thursday, April 5th 2018
Filing U.S. Taxes as an Expat: 4 Things You Need to Know
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Living abroad can be a breeze in many respects–from the slowing down of life pace to a reduced cost of living.
That said, there are inevitably a few elements that require navigation and learning.
For example, understanding the ins and outs of filing U.S. taxes as an expat may be new territory for you.
Although one expat’s financial and employment situation can vary greatly from another’s, there are a few basic things of which everyone should be aware.
Here are four things expats should know when it comes to filing U.S. taxes as an expat.
#1: Filing vs. Not Filing
A common mistake that many U.S. citizens make while living abroad is assuming that they don’t have to file U.S. taxes.
However, most U.S. expats still have a filing requirement, even if they pay taxes to their country of residence, and even if they don’t owe taxes to the United States.
Unfortunately, not filing can have consequences.
As H&R Block states, penalties for failure to file “could be thousands of dollars, and you may not be able to take part in advantages, special reductions, or benefits offered to U.S. expats to help reduce your U.S. tax obligation.”
That said, you may qualify for what’s known as “streamlined disclosure procedures” which reduce or eliminate any penalties.
Kimberly Morris is an Enrolled Agent (EA) based in San Miguel de Allende, Mexico.
She explains, “if you file your “catch-up” returns before the IRS notifies you of your negligence, then chances are that your penalties will be greatly reduced.”
Therefore, if you haven’t been filing U.S. taxes as an expat for the past few years and are worried about owing thousands of dollars in penalties, it’s advisable to take the time to talk to a certified tax preparer about your filing options or requirements.
#2: The Foreign Earned Income Exemption (FEIE)
Maybe you’re a full-time translator for a company in Mexico.
Or you work as a freelance web developer for various start-ups in California.
If you earn all or a portion of your income while living outside the USA, you may qualify for the Foreign Earned Income Exclusion (FEIE).
Using the FEIE, you can deduct a specific amount of your foreign earned income from U.S. income tax.
When filing your taxes this year for tax year 2017, the exclusion amount is $102,100.
What does this look like in practical terms?
Let’s say, theoretically, that you live abroad and earn $110,000 per year at your job with a foreign company.
You can deduct the $102,100 using the FEIE–meaning that only $7,900 of your income is taxable by the United States.
However, keep in mind that the tax rate used will apply to your total income of $110,000.
Additionally, there are a few stipulations to keep in mind when it comes to the FEIE…
The $102,100 needs to be foreign earned income. This means that passive income from pensions, interest, dividends, capital gains, etc., cannot be excluded.
You must either be a bona fide resident of your country of residence (meaning you have a resident visa, foreign tax obligations, and permanent residence for at least 12 months) or pass the physical presence test (meaning you are out of the U.S. for 330 days of any 365-day period) to qualify for the FEIE.
Those who are self-employed will still owe self-employment tax, as it’s a payroll tax–not an income tax. You can however set up a foreign corporation and pay yourself as an employee to no longer be self-employed.
#3: The Foreign Tax Credit
A different way to reduce your U.S. tax bill as an expat is the Foreign Tax Credit.
Let’s say that you live and work in Latin America. If your income is taxed by your country of residence, you can actually apply that foreign tax against your US tax.
However, as always, there are things to bear in mind.
For example, as Kimberly Morris points out, you may be able to get a foreign tax credit for income taxes paid to your country of residence, but not for taxes you paid on income you exclude on your U.S. return.
#4: Filing Deadlines
In the United States, April 17th is the official deadline to file your taxes.
However, expats have a little leeway.
Filing U.S. taxes as an expat means that you have an automatic 2-month extension each year–June 15th is the official deadline.
However, if needed, expats can use Form 4868 to apply for an additional filing extension to October 15th.
That said, if you are any later in filing taxes, you will be subject to a late filing penalty.
Tax payments, however, are due as accrued and should be paid quarterly to avoid the underestimated penalty and completely paid by the April filing deadline to avoid the late payment penalty and accrued interest.
As the tax deadline fast approaches, it’s important to become well-informed on what you do or don’t owe in taxes.
Keep in mind that although the four points we covered above are important, filing and paying taxes as an expat can be far more complex than what’s mentioned here.
Therefore, it’s important to consult professionals such as Kimberly to gain a comprehensive understanding of your situation.
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