April tax day is just around the corner. You may not be thinking about tax season yet because expats receive an automatic 2-month extension, or because you plan to request a 6-month extension.
But even if you don’t plan to file your tax return by April 15th you should prepare now to avoid paying interest and to leverage some potential benefits. (If this is your first tax season as expat, you might also want to check our 11 Expat Tax Tips Before Moving Abroad.
5 easy tips to get ready for expat tax season
1. Gather all tax documents
Tax documents such as forms W-2, 1099, 1098 or other tax documents are mailed out or available electronically starting the end of January. If you don’t receive a US-style tax document for foreign salaries or other income, use a local equivalent that shows your income and local tax paid. This might include your foreign tax return or a year-end pay stub showing income and taxes withheld YTD.
A good place to start is to review the first two pages and Schedule A of last year’s filing. There you will find all income and deductions you included last tax year.
Carefully review all the tax forms you received and request any corrections or missing forms if needed.
2. Estimate and pay the tax you owe
An extension is only an extension of time to file the return, not to pay any tax owed. Interest and failure to pay penalties on any owed tax will start accruing after April 18th, regardless of whether you have an extension to file or not.
If you did not make the minimum required estimated payments throughout the year, you may already be accruing interest and penalties. To determine if you owe any tax, you’ll need your tax forms and will have to make some general assumptions about deductions and exemptions.
3. Confirm IRA contributions
Any IRA contributions for the 2019 tax year must be made before the April 2020 tax due date. Contribution limits are $6,000, or $7,000 if you are age 50 or older, for both traditional and Roth IRAs combined.
Traditional IRA contributions are not limited by annual income. However, if and how much you can contribute to a Roth IRA depends on your modified adjusted gross income (MAGI). With incomes below $122,000 for single filers and below $193,000 for married filing jointly, you can make a full contribution. You can make a partial contribution in the phase-out range of up to $137,000 for single filers and $203,000 for married filing jointly.
If you already contributed to retirement accounts confirm that all contributions are within the legal limit. If the contributions exceed the legal limit, or you were not eligible to contribute, you can reverse them up until April 15th, or October 15th if you properly filed an extension. Failure to do so will result in a 6% penalty tax on any excess contribution.
Remember that you cannot take a tax deduction for a Traditional IRA if you also have a 401k plan at work.
4. File for an extension
If you need more time than the automatic 2-month extension given to expats to file your tax return, you must file for an extension.
April 15th is not only the due date for individual tax returns but also for the FBAR (FinCen form 114). However, if you don’t file by April 15th, you receive an automatic 6-month extension to October 15th for filing FBAR.
5. Advise your CPA of major changes
Major life changes can impact your tax situation, for example, changes to your marital status or dependents, moving, starting or finishing an expat assignment. Let your tax CPA know about those changes. You may need additional documentation to make use of deductions or exclusion pertinent to your new situation or you may need to adjust your withholdings and/or estimated taxes for the upcoming year.
Don’t let tax season become a last-minute frenzy. Use these 5 easy tips to help you stay on top of your taxes.
If you are looking for a tax CPA specialized in taxes for expats and US entrepreneurs abroad, we can help. Schedule a free consultation to discuss your expat tax needs with us and get a quote.
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