4 Tax Tips for Expats

Quite a few Americans live overseas and immerse in a new culture. Over 6 million people worked abroad in 2012 in different parts of the world. You may enjoy all the luxuries in your country of residence, yet that does not exempt you from paying taxes in the US.

The US is the only country where the taxation system does not depend on residence; instead, citizenship.

It means that if you are a US expat, you must pay taxes in the United States. All US citizens earning from any source have to pay their income tax.

Here are some tax tips for you if you are an expat:

Foreign Tax Credit

You can use the foreign housing allowance and FEIE or opt for a foreign tax credit to reduce your income. You can get a dollar-for-dollar credit for taxes paid to foreign countries on your income there. The main purpose is to save US citizens from paying income tax to multiple governments.

Foreign Earned Income Exclusion (FEIE)

Besides foreign tax credit, you can also save yourself from multiple tax payments by foreign earned income exclusion. It allows you to exclude up to $97,600 from the US taxable when you have been in a foreign country for at least 330 days out of 365. You can also get a partial exclusion if you return during the year.

Foreign Housing Allowance

The USA does not burden its citizens by asking for hefty income taxes. You can utilize the foreign housing allowance to get leverage over your total tax amount. Utilities, rent, repairs, parking, insurance, and other eligible housing expenses may be deducted to as much as 30% of the total FEIE. You may also benefit more if you live in an expensive location.

Social Security

Living as a US expat might allow you to utilize the retirement plan or social service of your residing country. The United States of America has totalization agreements regarding social security and medicare payments with over 20 countries. People working in a US-based company with a totalization agreement country can benefit from the social services of that country.

Is It Important For Expats To File Tax Returns?

Often, expats think they are paying for expenses in their country of residence, which should exempt them from the US income tax. Moreover, failing to file tax returns within the three-year IRS audit limit can lead to civil and criminal charges. Overseas American citizens may file tax returns with an extension from April 15 to June 15. 

Forty-one states in the USA impose a tax on their residents living as expats. Taxes for thirty-five states are based on federal income tax, six allow federal tax deduction, and seven states do not have a personal income tax. But the good part is that you can transfer your local domicile to a state with a lower tax liability. You may manage the tax matters yourself or take help from an expat tax CPA

The Bottom Line

USA’s tax returns rules are different from the rest of the world. US expats have to pay taxes in the US regardless of their residence. You can use a few tips such as the foreign tax credit, foreign housing allowance, foreign earned income exclusion (FEIE), and social security. Make sure to file your tax returns on time to avoid civil or criminal offenses.