Nobody likes paying taxes, but everybody must do them annually.
Paying your taxes can be a burden when you think about how much money you need to let go of. For expats, there are also additional tax laws and policies to comply with, which can make dealing with taxes much more difficult.
However, you don’t have to settle for the initial tax amount you have. There are effective and legitimate ways on how to reduce taxable income and pay less taxes—especially for U.S. expats who are looking to avoid double taxation.
Minimize your tax bills by taking advantage of the pro tips below.
8 Expert Tips to Pay Less Taxes
Regardless of net worth, anyone can be proactive and strategic in reducing taxes. One essential tip is to keep all your expense documents as they may be deductable from your income. Here are more specific strategies on how you can lower the amount of taxes you owe:
Take advantage of tax credits and deductions
The Internal Revenue Services (IRS) offers many tax credits and deductions, and you should claim all that apply to you. Don’t confuse tax credits with tax deductions, as they’re different. Tax deductions reduce the money you’ve earned within a year, turning it into your “taxable income.” Meanwhile, tax credits are a dollar-per-dollar reduction for the taxes you owe. While they are different, both help taxpayers to pay less in taxes.
For example, if your total earnings are $75,000, and your deductions are $5,000, your taxable income will fall by $5,000. With this deduction, you can avoid getting taxed at whatever rate that $5,000 falls under. If you’re taxed at 24%, you can save $1,200.
You have two choices for tax deductions: standard or itemized. The standard deduction is a flat dollar reduction based on your filing status, while itemized deductions are individual deductions you qualify for. It’s best to go for itemized deductions if it’s higher than your standard deduction.
Here are several deductions you can take:
- Foreign Earned Income Exclusion (FEIE) – You can exclude a certain amount of the income you’ve earned outside the United States.
- Home Office Deduction – If you work from home and a self-employed, you can deduct expenses for the business use of your home.
- Medical and Dental Expenses – You can deduct medical and dental care expenses made by you, your spouse, or dependents. However, you can deduct only the amount of your total medical expenses exceeding 7.5% of your adjusted gross income (AGI).
Credits are better than deductions because they cut your taxable income dollar-for-dollar. For example, if you owe $5,000 in federal taxes but are eligible for $5,000 tax credits, you won’t have any net liability. Some credits are even refundable, meaning you can get some or all of your money back. If your total tax is $500 and you claim a $1,000 tax credit, you’ll get a $500 refund.
Here are some tax credits you can claim:
- Foreign Tax Credit (FTC) – You can offset foreign taxes imposed on you by a foreign country or U.S. possession.
- Earned Income Tax Credit (EITC) – This tax credit is for low- to average-income families. If you qualify, you can use this credit to reduce your owed taxes. EITC is one of the refundable tax credits.
- Child Tax Credit – You can deduct a certain amount from your tax bill for every qualifying child you have. Usually, the deduction is $2,000 per child.
Maximize tax deductions for business expenses
Business owners and self-employed taxpayers have more tax reduction opportunities than individual taxpayers, with the numerous tax-deductible business expenses available. Aside from the Home Office Deduction mentioned, which is more for the office space itself, there are other ways you can lessen the amount of taxes you pay:
- Internet and Phone Bills – You can deduct the business use of your phone and internet. However, according to the IRS, “You can’t deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home.” You can deduct 100% of the costs of your second phone line because you can dedicate it to business purposes.
- Meals – When you travel for business, entertain a client, or attend a business conference, your meals become a tax-deductible expense. As per the Consolidated Appropriations Act, 2021, H.R. 133, meals and beverages provided by a restaurant have a temporary 100% business expense deduction until the end of 2023. Originally, meals were only deductible by 50%.
- Vehicle Use – Drives done for business purposes are tax-deductible; you just have to keep an excellent record of the trip’s mileage, date, and purpose. The IRS has a predetermined standard mileage rate, which you can use to calculate your deduction. Also, it’s important not to claim your personal car trips as business trips in hopes of avoiding tax as it is a criminal offense.
Donate to charity
Charitable donations are tax-deductible, and they don’t even need to be in cash. Donating food, household items, or clothes to a legitimate 501(c)(3) public charity or private foundation can lower your tax bill as long as you have a receipt.
Depending on the type of contribution and charitable organization, the amount you can deduct from your AGI ranges from 20–60%. For qualified contributions made in 2021, individuals can have an increased limit of up to 100% of their AGI.
Typically, you can only deduct charitable donations from your tax bill if you itemize your deductions. However, according to the IRS, the law now permits standard deduction filers “to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations.”
Individuals, including married individuals filing separate returns, can claim $300 in deductions for cash contributions. Meanwhile, for married individuals filing joint returns, the maximum deduction is increased to $600.
Use estate and gift tax exemptions
Estate and gift taxes are a set of federal taxes in which a transfer of wealth occurs. Both share the same lifetime exemption amount and rate; the main difference is when the transfer takes place. For estate tax, the transfer of the decedent’s property is upon death. On the other hand, a gift tax is a transfer made during your lifetime.
In 2017, Congress temporarily doubled estate and gift deductions until the end of 2025. From the $5.28 million individual limit in 2017, the exemption was lifted to $11.7 million per individual in 2021.
After death, a person’s assets become the property of their estate, from jewelry and artwork to buildings and stocks. If the decedent’s gross estate value exceeds $11.7 million in 2021, the IRS will tax it at a 40% rate.
Most people who take advantage of estate tax set up long-term trusts, allowing them to pass down generational wealth. If the wealth doesn’t meet the limit, the IRS won’t tax it as a gift. Additionally, it also won’t be subject to estate tax when the money comes out.
The annual gift tax exclusion for 2021 is $15,000 per recipient. It means that you can be free of gift taxes if you give anyone—a friend, relative, or stranger—assets that amount up to $15,000 a year. However, remember that these annual gifts aren’t income tax-deductible, and when you receive gifts, they aren’t counted as income.
Gifts can also be in the form of tuition and medical expense payments. For these gifts to be gift tax-free, you must give them directly to the institution.
Save for retirement through IRA contributions
An excellent way to lower your tax bill is by contributing to an Individual Retirement Account (IRA). For the 2021 tax year, the annual contribution amount can’t be more than $6,000 or $7,000 for people age 50 or older.
There are two main IRA types: traditional and Roth.
- Traditional IRA – You won’t get taxed on your contributions until you withdraw your money. This type of IRA is usually for contributions placed in your IRA before you’re taxed, allowing you to lower your taxable income for the tax year.
- Roth IRA – You get taxed upfront, which means that your contributions don’t lower your tax bill for the time being. But, when you retire, your distributions are tax-free.
Most people go for Traditional IRA when saving up for retirement as their contributions aren’t taxed presently.
Fund your FSA
Your employer may offer to give you a flexible spending arrangement (FSA) to help you save money and spend tax-free dollars on healthcare and dependent care expenses. Your employer manages this account, as your contributions get deducted from your salary. It allows you to set aside a portion of your pre-tax earnings, reducing your taxable income.
For example, if you fund $2,000 to your FSA and use that to pay for an eye exam, counseling session, pregnancy test, or prescription drugs, your money becomes non-taxable.
You can contribute up to $2,750 during the 2021 plan year. However, under the FSA use-or-lose provision, you must use most of your contributions by the end of the plan year, or else your unspent amounts get forfeited. For special conditions, your employer has the option to give you more time to use the money.
Use an HSA
Similar to FSAs, a health savings account (HSA) allows pre-tax contributions for qualifying healthcare expenses. You’re only eligible for an HSA if you have a high-deductible health insurance plan.
The difference between FSA and HSA is that you don’t have to use up the HSA by the end of the plan year. You can grow the money in your account for years and even invest it in the market. Additionally, your earnings from your investments are tax-free.
Once you turn 65, you can withdraw your HSA money and spend it on anything. For the 2021 contribution limits, it’s $3,600 for individuals and $7,200 for families.
Hire a professional tax service provider
If the tax terms and concepts above are still confusing for you, ask for tax planning help from a professional. As a novice taxpayer, you’ll be able to save more money and pay less taxes by hiring an expert to do your tax return or advise you on which strategies you can take to lower your tax bill and taxable income.
Taxes are complex, and if your tax situation is just as complicated, hiring tax preparation services can help simplify your life. With experts by your side, you also avoid making mistakes on your tax return. Correcting an error on your return will require you to file amendments to the IRS, costing you more time and possibly, interest and penalties.
Shrink Your Tax Bill and Save for the Future
For most of the tips mentioned, you must itemize your deductions rather than using standard deduction to get a lower deduction on your tax bill. However, putting in the extra effort to cut your tax bill is a well worth task because it can save you tens of thousands of dollars.
Working with Tax Samaritan guarantees that you get all the deductions and credits you’re eligible for as an expat. With over 25 years of tax resolution and wealth management experience, we can guide you throughout your tax filing process or handle it for you, all while making sure everything is accurate.