Moving abroad can be a hectic process. There are many things for Americans to consider when making a foreign country their home, taxes being one of them. New expats are understandingly concerned about how the move abroad will affect their US taxes.
While many are afraid of double taxation, in reality, expat life can bring significant tax benefits.
Below we share the top 11 tax tips every expat should know before moving abroad.
1. Expats still need to file US tax returns
One of the most common misconceptions Americans living abroad have is that they do not need to file US taxes. Many American expats believe that once they leave the country, their reporting and filing obligations cease.
Others think that because they can exclude foreign income from US taxes (more on that later), they don’t need to file.
Unfortunately, this is not the case. The United States government taxes citizens on their worldwide income. Filing is required regardless of residence. And even if you don’t owe any tax, you still need to file.
2. Most expats need additional tax forms
One of the key differences when filing taxes as an expat is the forms. Expats will likely need to submit several forms that they haven’t used in the past.
While the necessary forms vary in each case, most US taxpayers abroad will need to submit the following important forms:
- Form 2555 (The Foreign Earned Income Exclusion and the Foreign Housing Exclusion or Deduction)
- Form 1116 (The Foreign Tax Credit)
- FinCEN Form 114 (FBAR or Financial Bank Account Report)
- Form 8938 (Statement of Specified Foreign Financial Assets)
These forms include tax savings for expats and important declarations to the US government.
3. Save taxes with Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC)
When moving abroad, many are concerned about double taxation. The thought of tax liabilities in two countries can be worrying.
Luckily, there are two key tax benefits that can reduce or even eliminate your US tax burden when living abroad.
The Foreign Earned Income Exclusion (FEIE) is one of the most popular options. The FEIE allows expats to exclude over $100,000 from income tax.
To qualify for the FEIE, Americans abroad need to either be bona fide residents of a foreign country or to spend 30 days or less in the US per year.
Alternately, the Foreign Tax Credit (FTC) can also result in huge savings for expats. The FTC gives a dollar-for-dollar tax credit for taxes paid to a foreign government on foreign-sourced income. This is especially helpful in high tax jurisdictions.
In some cases, expatriates can combine the FEIE and the FTC for maximum tax savings.
However, Americans living outside the US need to remember that both the FEIE and the FTC must be applied for. They are not automatic.
4. Report foreign bank accounts and assets
Another key requirement for US Americans is reporting foreign bank accounts and financial assets.
The two primary forms used for this are the FinCEN Form 114 (Financial Bank Account Report or FBAR) and the Statement of Specified Foreign Financial Assets (Form 8938).
On the FBAR, you must report any foreign bank accounts that they have a financial interest in or signature authority over. Whether you need to report depends on the total balance of the accounts.
In addition to FBAR, Form 8938 is required when foreign assets and investments exceed certain thresholds.
5. Expats receive an automatic 2 month filing extension
Another important tax difference for expats is the US tax deadlines. Because many expats need to file taxes in another country first, the US government gives an automatic extension of two months. This extension gives Americans abroad a filing due date of June 15.
If you still need more time to file, an extension until October 15 can be requested.
But, regardless of whether the tax return is submitted in June or October, interest on taxes owed will still begin accruing on April 15th.
6. Consider moving to a no income tax state (if living in a sticky state)
Many Americans are not aware that they may still have tax obligations to the state they lived in before moving abroad.
In fact, the situation can be fairly complicated depending on the state. Certain “sticky” states such as Virginia, California, and New Mexico may consider you a tax resident, and responsible for taxes, even while you are abroad.
Individuals from sticky states should consider establishing residency in a no income tax state before moving abroad.
7. Keep a US address and bank account
While being aware of state taxes, expats should also consider maintaining a US address and bank account while living abroad. A US address and bank account can make many processes easier while living abroad.
This is especially true for retirees who are moving to Latin America or any less developed country. Expat retirees can technically have their Social Security checks go to a foreign bank account.
However, not all countries have banking systems that can ensure your payments will be delivered on time.
As an example, occasionally banks can lose the ability to process social security deposits for months at a time. When this happens, expat retirees can be put in a difficult position if they depend on the payments.
By maintaining a United States address and bank account, expats can make many parts of living abroad easier.
8. Timing of the move abroad may impact your taxes
While a job usually requires that you start work abroad on a certain date, occasionally you may have more flexibility. The timing of your move relative to the tax year could impact your filing.
Leaving closer to the beginning of the year gives expats more time to qualify for the Foreign Earned Income Exclusion (FEIE) by the time tax returns are due.
The total amount of savings can still be the same if the expat moves mid-year. However, they may have to request a tax extension because they need more time to qualify.
When using the Foreign Tax Credit instead of the FEIE, this is not a concern.
9. Know about PFICs before signing up for foreign life insurance and investment accounts
Oftentimes, foreign life insurance does not meet the IRS definition of life insurance.
Not only do those plans not enjoy the tax benefits of US life insurance. They may even be considered a PFIC (Passive Foreign Investment Company) and incur punitive taxes.
Foreign mutual funds and other types of foreign investments also fall under the PFIC definition. This is a complex tax topic. Expats should seek guidance from a tax advisor before signing up for those types of investments.
10. Capitalize on tax treaties and totalization agreements
Be aware of tax treaties and totalization agreements between the US and the new country of residence. These can typically reduce an expat’s tax burden.
Tax treaties deal with income taxes, whereas totalization agreements address social security taxes.
Crucially, tax treaties provide protection against double taxation in situations where a foreign tax credit would not apply.
11. Find a tax accountant experienced with expat taxes
Most US-based tax accountants are not familiar with the specific exclusions, deductions, and credits that can reduce expat taxes. We have amended many returns to correct errors and get refunds.
Finding a qualified tax accountant is important. An accountant is not only someone you trust with your financial data. He or she should know expat taxation well and deliver great service, no matter where in the world you are.
At Online Taxman, our team of expert accountants will walk you through each step of the tax planning process to ensure tax efficiency and peace of mind. Get started by setting up a consultation with one of our expert expat accountants below.