It’s everyone’s favorite time of year again. Tax time!
We know, at Online Taxman we get much more excited about tax season than almost everyone else.
We can help you get started. Let’s cover the expat tax basics.
Expats have to file a US tax return
First of all, it is necessary to file your taxes each year. This may seem obvious but many US expats fail to report. If your total income is above the following thresholds, you are indeed required to file a tax return.
Income thresholds (2018 tax year):
- Single: $12,000 if under age 65; $13,600 if age 65 or older
- Married filing jointly: $24,000 if both spouses under age 65; $25,300 if one spouse under age 65 and one age 65 or older; $26,600 if both spouses age 65 or older
- Married filing separately: $5 for all ages if spouse files a separate return and itemizes deductions
- Head of household: $18,000 if under age 65; $19,600 if age 65 or older
- Qualifying widow(er) with dependent child: $24,000 if under age 65; $25,300 if age 65 or older
- Self-employed: net self-employment income of $400 or more.
In addition there are other situations when you need to file a tax return, for example when you have unearned (passive) income above certain thresholds.
… even if they don’t owe any tax
Even if you don’t owe any US tax, you still have to file a tax return if you meet the income thresholds above.
A common misconception among expats is that if they earn less than about $100,000 they qualify for the Foreign Earned Income Exclusion (FEIE) and don’t have to file. This is false. You can only claim the FEIE if you actually file a return.
If you haven’t filed in the past, maybe because you weren’t aware of the requirement, you should catch up on back taxes. The IRS has programs in place for getting back into compliance. Talk to an experienced expat tax CPA about the best strategy.
Doing taxes yourself vs using a tax accountant
Expat tax can get very complex.
You could use DIY software like TurboTax in simple cases, if you are willing to do research on expat tax topics and dive into the actual tax forms. The guided questions approach of those programs is geared towards domestic filers and doesn’t provide good guidance for expats. Some expat tax scenarios are called “this is uncommon” in the DIY tax software and are easily overlooked by inexperienced tax filers.
To make sure you don’t miss out on any expat-specific deductions and to ensure that everything is done correctly, use an experienced expat tax accountant. Even most US-based CPAs are not familiar with the regulations around expat-specific provisions of the tax law.
How to get ready for preparing your expat taxes
Your last year’s return is always a good starting point for preparing for the new filing. If you start working with a new accountant, he or she should want to review your prior year returns to be aware of any carryovers or other assessments.
For the preparation of your tax return, you need documentation about your income and any applicable deductions and exclusions. You can find general checklists for US taxes on many websites. Here we focus on specifics for expats.
Earned income – Salary, wages, freelance income
If you are employed at a US company you should’ve received a W-2 from your employer.
As an independent contractor or freelancer you would get a form 1099-MISC instead of a W-2. In addition, when being self-employed you must keep track of all income, even if it is not reported on a 1099-MISC and even if it is from a foreign source.
Employers outside the US usually don’t issue a W-2 or 1099. In that case, you need a document that shows your income and any taxes paid in your host country. Most companies are able to give you a local tax document equivalent to a W-2 or a year-end summary with the income and tax information. Otherwise, you can use your own spreadsheet to track your foreign income and foreign tax paid, if any.
Passive income – Investment and other non-earned income
Stock and Securities Transactions: For any stock or security that you bought or sold in the tax year, you have to record the capital gain or loss. US brokerages provide a year-end statement and form 1099-B.
Foreign financial institutions may not issue a similar statement, so it becomes your responsibility to document all reportable transactions, e.g. using periodic or monthly statements. Keep in mind that you have to report even those foreign transactions that may not be taxable in the foreign country but are in the US.
Interest and Dividends: If you are receiving interest or dividends from US investments you should receive a 1099-INT or 1099-DIV. For non-US investments you can use monthly or year-end statements. If those are not available you may have to ask your bank to compute the total interest and dividend income for the tax year for you. Again, even if those foreign interest and dividends are tax-free in that country, you still must report those on your US tax return.
Social Security and pension income: For US Social Security payments you receive form SSA 1099. Other US pension and retirement income is reported with form 1099-Ret. Payments from foreign social securities and pensions however may not have similar year-end statements, so you need to keep track of the payments using your bank accounts or other statements.
Rental income: If you have any rental property, no matter where in the world, or you rent out your own home, you must report the income. Most vacation rental platforms will supply a year-end report if you make over a certain threshold. If not you will have to put together the numbers yourself. Remember to also record all related expenses so that you can determine your net rental income.
Special tax exclusions and deductions for expats
Expats can take advantage of some deductions and exclusions that are not available to most US citizens.
Two of the biggest tax savings for expats are the Foreign Earned Income Exclusion FEIE and the Foreign Housing Deduction. To qualify, you have to be either a Bona Fide Resident of another country or meet the Physical Presence test.
Here’s what you need to claim these special tax exclusions and deductions for expats:
Your travel calendar: In order to qualify by means of the Physical Presence Test you need to prove that you have spent at least 330 days in a 12 month period in foreign countries. Furthermore, the FEIE and housing deduction are prorated, so you need your travel dates to calculate the exact number of days.
Foreign earned income and housing cost: In addition to your foreign earned income mentioned above, you need a list of your housing expenses such as rent and utilities.
Foreign taxes paid: Another way you can save on US taxes is through the Foreign Tax Credit, which is a deduction of the taxes you have paid to a foreign country. If you live in a high tax country, using the Foreign Tax Credit may be more beneficial than claiming the Foreign Earned Income Exclusion. Unused tax credit can be carried back one year, or forward for 10 years.
Don’t forget about reporting foreign accounts
In addition to filing your tax return, you must report your foreign financial accounts. If at any time of the year the combined balance exceeds $10,000 US, you have to file FBAR. Read more about when you must report foreign accounts here.
Let’s get started with your expat tax return
Once you have all your documents together, don’t wait until the last minute to get started. Even though expats have until June 15 to file their return, interest for owed taxes starts accruing on April tax day. Furthermore, IRA contributions for 2017 have to be made before the April tax deadline.
Of course, if you would like us to help you with your taxes, you can schedule a free consultation here. We have helped thousands of expats filing their returns. Our secure online process makes it painless, no matter where you are in the world. We make sure that everything is filed correctly, giving you peace of mind.