Moving abroad is an exciting adventure with new experiences, possibilities, and challenges. One of the biggest hurdles many expats face is understanding tax implications in the host nation. For US expats, tax can be particularly complex because the US requires citizens to report taxes wherever they may be. The good news is that there are legal ways to minimize tax costs and maximize savings.
If you are paying expat taxes, take a moment to review these tax-saving tips before submitting your returns. If you take these tips to heart, you will be able to keep more of your hard-earned money and still remain tax-compliant.
Leverage Foreign Tax Credits to Mitigate Double Taxation
Being a US citizen or a holder of a Green Card, you need to pay taxes on global earnings. Nevertheless, you may not need to pay tax twice for the same revenue. You have the benefit of claiming a Foreign Tax Credit (FTC) or Foreign Earned Income Exclusion (FEIE) so as not to get doubly taxed.
Foreign Earned Income Exclusion (FEIE)
With the Foreign Earned Income Exclusion (FEIE), you can exclude as much as $120,000 (for 2023, adjusted for inflation each year) of income earned abroad from your US taxable income. To be eligible, you can pass either:
- The Physical Presence Test – You need to be present in a foreign land for a minimum of 330 days over a 12-month period.
- The Bona Fide Residence Test – You should be a bona fide resident of a foreign country for a full tax year.
You have to file Form 2555 with your tax return to claim FEIE.
Foreign Tax Credit (FTC)
If you pay taxes to a foreign government, you can offset your US tax liability by claiming a Foreign Tax Credit (FTC). FTC permits you to subtract foreign taxes paid from your US tax liability. To claim FTC, you have to file Form 1116.
Use the Foreign Housing Exclusion
It can be costly to live overseas, particularly in a place like London, Hong Kong, Dubai, or Singapore. Luckily, the IRS provides another tax relief called the Foreign Housing Exclusion or Deduction. This section permits expats to deduct some housing costs like rent, utilities, and insurance, thus lowering taxable income.
To be eligible for this exclusion, your costs should be over a threshold as established by the IRS, and the threshold varies based on your place of residence. Expats who reside in areas where there is a high cost of living are given a greater exclusion threshold. This exclusion is also claimed on Form 2555.
Track Foreign Exchange Rates for Improved Tax Results
Another tax-saving technique that is often ignored is recording foreign currency exchange rates while preparing tax returns. As US tax returns are required to be submitted in US dollars, you will be required to convert your foreign income through an exchange rate.
The IRS provides you with the option to use either:
- The exchange rate on the transaction date for each transaction
- The average annual rate for the year of tax
Choosing the right exchange rate method can significantly impact your taxable income. If your income fluctuates due to currency changes, consult a tax professional to determine the best approach for reporting your earnings.
Be Aware of Accountant Fees and Hidden Charges
Expatriate tax filing is complex, and most individuals outsource it to professional accountants. However, expats should be careful when it comes to accountant charges. Some accounting firms promote low fees but charge extra for ancillary services.
To prevent surprise costs, seek accountants who:
- Charge a flat fee
- Are open about their fees
- Are experts in US expat tax regulations
Contrasting several tax preparers and consulting customer reviews may assist you in identifying an honest accountant who offers value for money.
Remain Compliant with FBAR and FATCA Reporting
In case you possess foreign bank accounts or foreign investments, you might also be required to meet further reporting requirements:
- FBAR (Foreign Bank Account Report) – If you own foreign accounts totaling over $10,000 at any time during the year, you must report FinCEN Form 114.
- FATCA (Foreign Account Tax Compliance Act) – If you have foreign assets above $200,000 (for expats living abroad), they need to be reported on Form 8938.
Not reporting them can bring significant penalties, so be careful to comply in order to minimize unnecessary financial woes.
Plan Retirement and Investment Strategies to Maximize Tax Benefits
Expats can make use of tax-efficient investment and retirement planning techniques to maximize their tax burdens. Some of the important considerations include:
- Roth IRA Contributions – Based on your foreign earnings and exclusions, contributing to a Roth IRA can be helpful.
- Foreign Pension Plans – Tax treaties between the US and many countries affect the taxation of foreign pensions. Familiarity with these treaties avoids double taxation.
- Health Savings Accounts (HSAs) – If you have a US-based HSA, it is still a tax-favored means of saving for medical costs while abroad.
Strategically Plan Your Tax Filing Deadline
Expats are automatically granted an extra two months to file US taxes, so the deadline is June 15 rather than April 15. Nevertheless, unpaid taxes are still due by April 15 to prevent penalties. If you require more time, you may ask for an extension until October 15 by submitting Form 4868.
Final Thoughts
Figuring out tax regulations when living overseas is complicated, but with thorough planning and effective strategies, you can legally reduce your tax liability. By taking advantage of foreign tax credits, tracking exchange rates, and meeting tax report requirements, you will have access to valuable information.
