Pushing yourself out of your comfort zone allows you to realize your potential. Moving out from your home, your city or even the country allows you to meet different kinds of people with different ideas and outlooks towards life. One of the best and easiest way to evolve as a person is to work in a different country. However, the perks of earning abroad in a foreign country has consequences, one of which is, owing taxes to your home country. For American expats living and earning abroad, filing their U.S. tax return is mandatory. So, let’s explore common things U.S. expats must remember before filing U.S. tax return.
More Time To File
The normal tax deadline for American citizens and residents, earning above $10,000/year, is April 15th. However, for expats, they benefit from an automatic two-month extension to June 15th, which can be extended to a further six months till October 15th, if needed.
FBAR and FATCA Requirements
For expats having more than $10,000 in a foreign bank or foreign investments, it must be reported, as per Foreign Bank Account Reporting (FBAR) rules. This applies to anyone having signatory authority over foreign accounts, also. Moreover, expats have to file FATCA Form 8938, with their tax return, to report foreign financial assets, including bank accounts, over $200,000.
Since many expats were/are not aware of the mandatory filing of U.S. tax return, the IRS introduced the Streamlined Procedure, which allows them to catch up on their missed tax returns without any penalties. Under the Streamlined Procedure, an expat living and earning abroad can file his/her tax returns for the past three years and his/her FBAR for the past six years and make a declaration that the missed filing of tax return and missed FBAR’s was non-willful.
If it is found, upon filing that back taxes and interest are due, then it must be paid. But in most cases, expats once they use the below-mentioned exemptions, have minimal or nil taxes owing. With FATCA being strongly enforced, the IRS can easily track down expats to know their filing status and their foreign financial information. If a notice is sent by the IRS, before you file your expat tax return, then the option to back-claim the exemptions will not be available.
Two of the most readily opted exemptions used by expats is the Foreign Earned Income Exclusion(FEIE) and Foreign Tax Credit (FTC). Using Form 2555, expats are exempt from the first $100,000 of their foreign earned income. But claiming FEIE requires proof of residency in the foreign country.
For those who have paid taxes in their resident country on the income earned can opt for Foreign Tax Credit, using form 1116, which allows a credit for every $1 of tax paid in the foreign resident country. Additionally, any excess credit can be carried forward for future use. Furthermore, expats may also be able to use Foreign Housing Credit.
File State Taxes
Unless, an American citizen has moved abroad permanently and has no financial or family ties to the last state of residence in the U.S., he/she may have to file state taxes. For those on temporary assignments in the foreign country, state taxes must be compulsorily filed.
Some experiences can be avoided in life, such as getting caught by the IRS for non-filing of expat tax return. Enlist the aid professional tax experts to ensure your U.S. taxes are filed accurately and in a timely manner utilizing all the available exemptions and deductions.