At Tax Samaritan, we are often asked by US expats, what are the most important things that they need to be aware of as a US taxpayer. Enclosed is our top 6 list of what US taxpayers should be knowledgeable about when it comes to their expat taxes:
1. Taxation of Worldwide Income
The U.S. is the only country that has taxation of worldwide income for all of its citizens, no matter where you live and regardless of how long you have been overseas. If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad.
With taxation of worldwide income, your U.S. and foreign income is subject to U.S. income tax, regardless of where you reside. It is known as a citizenship-based income tax. Elsewhere in the world, the basic rule is that taxes are based on residency and not on taxation of worldwide income based on citizenship.
2. State Income Taxes
Unless you resided in one of the states that does not have a state income tax prior to your move overseas, it is likely that you will have expat taxes applicable to your state tax return for one or more years. Filing requirements and residency rules vary from state to state with some states more aggressive in their rules in deeming an overseas taxpayer a state tax resident even when residing overseas for years.
3. Foreign Earned Income Exclusion And Expat Taxes
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income and as such must file a U.S. return for all the years that you are residing abroad. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($99,200 for 2014). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the foreign earned income exclusion and foreign housing exclusion.
A common misconception is the belief that a US tax return is not required when income is below the exclusion amount. However, that is a myth and not true. While tax liability may be zero when applying the exclusion, it is not zero until the exclusion is formally claimed on a tax return. Thus, a timely claim for the foreign earned income exclusion by filing a US expat tax return must be made in order to benefit from this tax savings.
4. Foreign Tax Credits – They Can Help Minimize Expat Taxes
While living abroad, your foreign country may also tax any income earned within their borders. To offset this potential for double taxation, the US tax code provides a foreign tax credit that can be used to offset expat taxes assessed by a foreign country on the income earned there. The purpose of the foreign tax credit is to minimize your combined foreign and U.S. tax obligations.
5. Tax Deadline For Expat Taxes
If you reside overseas on the regular due date of the tax return of April 15, you are eligible for an automatic two-month extension till June 15 to file your expat taxes. Any taxes paid after April 15 and by June 15 will not be subject to any late payment or filing penalties, however interest will be charged on the expat taxes due during this period of time.
6. Be Sure To Report Your Foreign Bank Accounts On the FinCEN Form 114 (FBAR)
Your FBAR disclosure must be filed for each year that you have a financial interest in or authority over foreign financial accounts that exceed $10,000 in the aggregate. The FBAR must be filed on or before June 30 each calendar year and must be filed electronically on the FinCEN Form 114. Unfortunately, extensions of time to file federal tax returns do not extend the time for FBAR filing. There are no extensions of time to file an FBAR. So be sure to file on time, accurately and completely as the potential penalties are draconian.
Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions. Our focus is expat tax preparation for US taxpayers abroad.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
When looking for an expat taxes professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.