As an expat, it’s really easy to get caught up in the tax confusion. Throughout our time serving as certified tax professionals at US Tax Pros, we’ve seen tons of expats struggling with their tax fulfillments.
Expats have to undergo extra steps and guidelines to file their US taxes. And with that, it’s very easy to miss a step or find yourself having to pay more or even worse, facing penalties. That’s not fair because we believe with proper guidance that can be easily avoided. So today we’ve compiled a guide that’s tailored to help you avoid unnecessary costs as an expat – while also helping you mitigate the risk of unwarranted penalties.
1. File A US Return Only If You Meet The Requirements.
As obvious as it might seem, it’s true, filing taxes is not for every US expat. Only US expats that surpass certain thresholds are mandated to pay expat taxes, and it’s all tied to your gross income.
Here are the various thresholds to meet so that you are eligible for taxation.
1. Single
• $12400 under age 65
• $14,050 if 65 and older
2. Married Couple Filing Separately
• $5 at any age, and yes you’ve not read that wrongly (It’s actually $5)
3. Married Couple Filing Jointly
• $24,800 if both partners are under 65
• $26,100 if one partner is 65 or older
• $27,400 if both partners are 65 or older
• $5 if both partners are under 65 but do not live together at the end of year.
4. Head Of Household
• $18,650 if under 65
• $20,300 if 65 or older
5. Qualifying Widow/Widower
• $18,650 if under 65
• $20,300 if 65 or older
6. Self Employed
If you are self-employed and you’ve had earnings over $400, then you must file a U.S income return.
2. Avoid Double Taxation Through Various Enactments.
What Is Double Taxation?
Double taxation means being taxed twice for the same income. American expats can be subject to double taxation if they owe taxes to both the US and their country of residence.
Is Double Taxation Allowed By The Law?
As unfair as it might seem, yes, double taxation is indeed considered lawful. Corporate shareholders are the most common target for double taxation. But that does mean that as a normal American expat you are spared from undergoing double taxation.
The good thing, however, is that the US government has put in place enactments to prevent you from being double taxed. These enactments include:
1. Tax Treaties
The two main types of treaties are:
• Income Tax Treaties
• Totalisation Agreements
These treaties determine which country will tax a given source of income.
For example, you might be required to file pension payments to the US, and maybe pay dividends to the host country. Different countries have different tax treaties, so it’s good to be aware of how they work too.
To claim a tax treaty benefit, you will need to file an 8833.
2. Foreign Earned Income Exclusion
The FEIE is the most popular enactment to prevent double taxation. Expats that pass the Bona Fide Residence Test or Physical Presence Test can use the FEIE to exclude up to $100,000 of foreign earned income from their US tax obligations.
Foreign earned income includes:
• Salary
• Wages
• Commissions
• Bonuses
• Tips
• Self employed income
The FEIE cannot exclude:
• Interests
• Dividends
• Capital gains
• Rental income
• Pension payments
• Distributions from sources like trusts or retirement accounts
3. Foreign Tax Credit
Even though the FEIE is the most popular, foreign tax credit is probably the most reliable. In this enactment, the IRS will give you tax credits equal to at least part of the taxes that you paid to a foreign government. Most of the time they’ll award you the entire amount you paid in foreign taxes, wiping off any chances of double taxation.
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3. Take Care When Choosing Between FEIE and FTC
The FEIE and FTC both have their perks and choosing between them could have a significant impact on your tax returns. Generally speaking, the FEIE is better if the tax rate in your country of residence is lower than in the US.
While FTC is preferred when the tax rate in your country of residence is higher than in the US.
And if you’ve been using the FEIE and decide to switch up to FTC, you might find yourself locked out of the FEIE for up to five years.
Comparison Between FEIE and FTC
1. Tax Liabilities
When it comes to foreign tax liabilities, FTC can greatly help you in them.
2. Income Source
If your source of income is only from foreign wages, then the FEIE would be more suitable.
3. Residency
The FEIE is more stringent about your residency when compared to the FTC. To qualify for the FEIE, it requires you to spend less than 35 days a year in the USA
The FTC is less limiting. You can have access to its aid regardless of where you live and how long you stay there.
4. Pay Up Multiple Years Of Expat Taxes To Avoid Penalties
It’s common that most US expats overlook their US tax obligations when living abroad. And it’s not always intentional, as some aren’t even aware they are supposed to pay taxes to their mother country.
But here is the good news.
You can now catch up on multiple years of expat taxes, through the Streamlined Filing Compliance Procedures. This is a program that supplemented the now non-existing Offshore Voluntary Disclosure Program. Its main aim is to minimize penalties on expats who were unaware of their tax obligations.
To qualify:
• You must have lived in a foreign country without a US home for at least 330 days during one of the last three years.
• You confirm that it was an unwillful and genuine mistake to not file your US tax returns and FBAR.
After it’s confirmed that you qualify for the Streamlined Filing Compliance Procedures, you will need to:
1. File income tax returns for prior three years of not filing.
2. File an FBAR for the prior six tax years.
3. Write a statement of explanation explaining why your tax returns and FBAR were not filed.
4. Pay the tax and accompanying interest due for the last three years.
Even if you don’t qualify for the Streamlined Filing Compliance Procedures, you still have options to catch with minimal penalties through:
• IRS-Criminal Investigation Voluntary Disclosure Program.
• Delinquent international information return submission procedures.
If it’s getting too overly complicated for you, we are here to help. We can look at your tax documents in the tax portal and our experienced tax experts will guide you definitively.
5. Take Advantage Of The 2-Month Extension
This is one of the benefits of being an American expat.
If maybe you are a bit held up, and the date (April 15th) catches up unwittingly, you will be given an extension of 2 months to file. This gives you time until June 15th to file your returns. Resident aliens living abroad and military officers can also benefit from this grant. However, if even the two month extension is still not enough for you to gather enough information, then you can opt to work with us to help you file Form 4868 to extend your deadline to October 15. The deadline for requesting this extension is June 15th.
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6. Have Good Comprehension Of All The Forms Commonly Used As An Expat.
There are tons of IRS forms that you need to be aware of so that you don’t get left out.
Here are the main ones:
1. Form 1040 – The form used to report income to the IRS.
2. FBAR (Form 114) – If you have a foreign bank account, this form is used to report any of your assets in foreign financial institutions.
3. Foreign Earned Income Exclusion (Form 2555) – A form that you fill out to prevent you from being double taxed.
4. Foreign Tax Credit (Form 1116) – The other form for U.S. expats to prevent double taxation.
5. FATCA (Form 8938) – Used for reporting assets in foreign financial institutions to the IRS.
6. Form 5471 – If you are a shareholder, office-bearer, or director of a foreign institution, then this form is used to notify the IRS of your ownership in the foreign corporations. It’s more of an informational report.
7. Form 8621 – If you are a shareholder of a passive foreign investment company, then this form is used to notify the IRS of that. Again, this isn’t a tax return per say, but an informational return.
8. Form 3520 – This is a form used to report transactions with foreign trusts, ownerships of foreign trusts, or if you receive certain huge gifts from certain foreign persons.
And with good comprehension of these forms, it’ll be hard for you to be found lacking on the wrong side of the law and incurring unwarranted penalties.
7. As An Expat, Limit Travel To The US To 30 Days
To be able to take advantage of Foreign Earned Income Exclusion, then you’d have to limit your travel days in the US to 35 only. The reason is because traveling too much can cause you to fail the physical presence test – which in turn denies you the ability to claim the FEIE.
Need Help Filing Your Taxes?
It’s no secret that filing your taxes as an expat can weigh a ton. Especially if you’ve never done so before. But either way, we are reaching out to all US expats in New Zealand. If you want a smooth ride to settling all your pending tax concerns, then contact us today and someone on our team will get you going.