April Tax Day is just around the corner. You may not be thinking about tax season yet because Americans abroad 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 a US expat, you might also want to check our 11 Expat Tax Tips Before Moving Abroad.
6 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 in the last tax year.
Be careful when reviewing as the first two pages are usually summaries of income and deductions calculated on other forms in the return. This means it can sometimes not be clear as to what the number represents.
After reviewing all the tax forms you received, 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 15th, 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 retirement contributions
Any IRA contributions for the 2020 tax year must be made before the April 2021 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.
Keep in mind that if you have a SEP IRA you can contribute much more than this.
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 $124,000 for single filers and below $196,000 for married filing jointly, you can make a full contribution. You can make a partial contribution in the phase-out range of up to $139,000 for single filers and $206,000 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 file an extension. Failure to do so will result in a 6% penalty tax on any excess contribution.
Remember that you can take a tax deduction for your Traditional IRA contributions.
If you are not covered by an employer-sponsored retirement plan (such as a 401k, SEP IRA, SIMPLE IRA, etc.), then you can deduct the full contribution amount.
If you are covered by an employer-sponsored retirement plan, then you can only take a deduction for your Traditional IRA contributions if you are below the income limits.
In other words, if you are covered by an employer plan and are earning less than $65,000 as a Single filer or $104,000 as Married Filing Jointly, you can deduct the full contribution amount.
If you earn more than that, the deduction is phased out until $75,000 as a Single filer and $124,000 as Married Filing Jointly. After those amounts, you can still contribute to a Traditional IRA, but you can’t take a deduction.
4. File for an extension
If you need more time than the automatic 2-month extension given to US taxpayers overseas 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 assignment abroad. 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.
6. Claim your coronavirus stimulus check
If you were eligible for a stimulus check in 2020 and didn’t receive it, or if you didn’t receive the correct amount, you can claim a credit on your tax return. Be sure to speak with your accountant about this.
You should have received Notice 1444, Your Economic Impact Payment, from the IRS regarding your stimulus payment. If you received both stimulus payments, you should have received the first notice in the spring or summer of 2020 and the second notice in January or February 2021. Include these notices in the paperwork you provide to your accountant.
Don’t let tax season become a last-minute frenzy. Use these 6 easy tips to help you stay on top of your taxes.
If you are looking for a tax CPA specialized in taxes for Americans abroad and US entrepreneurs abroad, we can help. Schedule a consultation to discuss your expat tax needs with us and get a quote.