For U.S. citizens and residents living and working overseas, US expat tax rules are a pain. They are overwhelming and often times it’s a struggle to find accurate information, even from the IRS let alone the majority of tax professionals. Expat tax is certainly far more complex than it needs to be and the burden has become even greater as laws implemented to cut down on tax cheats with overseas accounts have increased the cost of compliance and the volume of paperwork for an expat tax return.
Expat Tax Rules Are A Pain For Expatriates
As an U.S. expat taxpayer residing overseas, you are subject to U.S. tax on worldwide income. There is a common myth regarding expat taxes, in that if there are no taxes due, a tax return doesn’t need to be filed. But this is often not the case. Expat tax filing requirements are the same as all other taxpayers, whether in the U.S. or overseas, in that if the filing requirements (which are generally based on gross income) are met, a return must be filed.
It is true that there are a number of areas of the U.S. tax code that can be utilized within the realm of expatriate taxation to reduce U.S. taxable income and tax liability such as the:
- Foreign Tax Credit
- Foreign Earned Income Exclusion
- Foreign Housing Exclusion
- Foreign Housing Deduction
However, while you there may be no taxes due or a significantly reduced tax liability as a result of claiming these tax benefits, there is no benefit unless claimed by filing an expat tax return.
To further complicate expat tax rules, not all states handle expat taxes the same way. This can be manifested in various unique state expat tax rules such as differing filing requirements and whether you are still considered a resident of the state (and required to file a tax return and pay state taxes) even though you have moved overseas. Federal and state expat tax rules are complicated, so be sure that you share information about your prior state residence when seeking help from a tax professional for expatriate tax services so that your state tax filing requirements can be thoroughly analyzed.
Key Points Of Expatriate Taxation
Below is a summary of the key points of expatriate taxation:
- Expatriate taxpayers who maintain a foreign tax home may be eligible to exclude all or a portion of their foreign earned income from U.S. taxation by claiming the foreign earned income exclusion.
- To qualify for the foreign earned income exclusion, the expat taxpayer must qualify as an expatriate under either the physical presence test or the bona fide residence test.
- U.S. storage expenses for your household belongings, such as furniture, while you are overseas may be deductible.
- The foreign tax credit may further reduce your U.S. tax liability and reduce double taxation.
- The amount of foreign tax paid or accrued used for determining the foreign tax credit is not necessarily the amount of tax withheld. Only the legal and actual foreign tax liability that the expatriate paid or accrued during the year qualifies for the credit. Any foreign tax amounts that are eligible for a refund, whether claimed or not, are not eligible to be claimed as part of the foreign tax credit.
- The income tax rate for expat taxes is calculated based on taxable income, without taking into consideration the foreign earned income exclusion. In other words, the expat tax rate is determined as if the excluded foreign income was not excluded. This may result in a higher tax rate applied to income not eligible to be excluded (i.e. above the exclusion amount).
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Tax Samaritan is focused on ensuring that accurate and complete returns are prepared for expatriates while paying the lowest expat tax liability legally possible.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on expat taxes. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate Americans abroad on their tax responsibilities, so that they can look for planning alternatives on time. They are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid. If you found this article helpful, you’ll likely benefit from our future ones as well – so we encourage you to avoid pitfalls and join our mailing list:
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When looking for a tax professional, choose carefully. We recommend that you generally want to hire an Enrolled Agent, such as Tax Samaritan or other professional licensed to practice before the IRS, such as a CPA or attorney who is experienced in expat tax preparation (most tax professionals have limited to no experience with expat taxes).
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.