Starting To Think About Filing Your Expatriate Tax Return? Wait! Read This First: How to Save Money on Your US Expat Taxes
Living and working in a foreign country, whether it is temporary or permanent, can be a fulfilling and rewarding experience. Moving to another country, although exciting, does come with some challenges and requires that you learn a bit of new information as it relates to your US taxes. In order to reap the full benefits of living abroad you need to do some research regarding your expatriate tax return obligation before you need to file. No one likes filing their taxes, and certainly no one likes to spend money unnecessarily, so saving money is crucial. This article will provide you with four great ways to save on your US expat taxes.
Take advantage of the Foreign Tax Credit & Foreign Earned Income Exclusion
While you’re living abroad and filing your US taxes, it is important to make sure that you take full advantage of Form 1116 and Forms 2555, otherwise known as the Foreign Tax Credit Form and the Foreign Earned Income Exclusion, respectively. The Foreign Tax Credit gives you a credit on your US expat taxes for the amount of money you have paid in tax to a foreign government. The Foreign Earned Income Exclusion helps you by excluding a big chunk of your foreign earned income from your US taxes. This is important because even as a US expat, all of the income that you make outside the United States is subject to identical tax rates as someone who is working and living inside of the US. That is where Form 2555 comes in. By completing this form, you can exclude up to $91,500 USD of income earned abroad from your US expat tax return. While including potential deductions of housing and living expenses, it is possible to counterbalance most if not all of your tax liability in a given calendar year.
The Foreign Tax Credit (or Form 1116) is different than Form 2555 but they work together to help you save money on your expat tax return. It is important to note that many people take a wrong turn when using these two forms by assuming their taxes will be offset by the numbers they have worked out, and they decide not to bother filing their expat taxes at all. Clearly this isn’t going to do you any good! If you earn money abroad you will need to file in order to receive these tax breaks and avoid being hit with penalties.
Adjust your Foreign Housing Credit for the country you live in
A second tip for filing your US expatriate tax return is to make sure your Foreign Housing Credit is adjusted for the country you live in. The rates vary from country to country which can drastically affect the end result, so it is extremely important to make sure that this is adjusted. As a US citizen living and working abroad, you may be eligible to deduct some of your housing costs from your income in order to save some money on your taxes. In order to qualify for this deduction, you need to meet the “bona fide residence test” or the “physical presence test.” This test ensures that you are indeed living and working abroad. The IRS allows this deduction because they recognize that you may need to spend more money on housing outside of the US. Generally, the deduction is for a maximum of $27,450 or 30% of your Foreign Earned Income Exclusion and you deduct this amount from your gross income for housing costs. As mentioned, this rate is adjustable depending on where you are living. For example, compared to living in the US, places such as London, Paris, Singapore, Hong Kong, Dubai and Perth all qualify for a much higher deduction rate than the standard rate due to the higher costs of living. By being aware of the changing rates associated with your country of residence, you could end up saving a lot of money!
Use the most advantageous foreign exchange rates
You can also save a lot of money by making sure that the accountant who is filing your expatriate tax return is using the most advantageous foreign exchange conversion dates. When filing your taxes, you can choose different foreign exchange periods such as annually or on a specific day. Making sure you make the right choice as to what period you choose can end up saving you a lot of money in the long run. For example, if you receive a $10,000 bonus on June 1st and the foreign exchange rate is lower than the monthly number has been, you may want to use the specific date to translate it into US Dollars (as everything needs to be filed in US dollars).
Don’t get overcharged for your expatriate tax return preparation fees!
Finally, it is imperative to hire a qualified expert to prepare your US expat taxes and agree upon and pay one flat fee to the person who is filing your expatriate tax return so that you aren’t surprised by the final bill. It happens all too often that expatriates believe they will be paying one amount only to be hit with extra charges and fees on their final bill. Many companies don’t disclose their prices or they quote you one price only to have add-ons for each additional service. This obviously means that the tax bill can increase over the course of preparing the return, and you do not want to pay more than you can afford or more than you were expecting. You need to find someone you are comfortable dealing with and this likely means a company that has very transparent prices!
As you can see, there are numerous ways to save money on your US expatriate tax return. By understanding the credits and exclusions that are available to you as an expat, you can ensure that you are well informed and knowledgeable about the ways can save you money. For more information about how the various components of an expatriate tax return work please have a look at our new series Your Expat Taxes Explained.