Are you working abroad and have to pay your taxes? Do you find it challenging to pay your taxes and need to learn about tax filing? Then, don’t think much as you have come to the right place at USTAXFiling.in. We are well-known tax professionals who are there to help you anytime. At USTAXFiling.in, you will get the best Expat Tax Advice. So, when it comes to filing your income taxes, you must eliminate these five mistakes on your US income taxes. Continue reading to get more updates and insights. Click here for more updates at USTAXFiling.in!
Whether you are someone staying overseas or a well-seasoned expat, you may find it difficult, anxiety-provoking, and confusing to file taxes as a US expat. You are assured that it is not uncommon for Americans staying overseas to make mistakes, but at times these mistakes are even expensive. You must take your expat tax advice to eliminate these expats married or even separately filing taxes mistakes and much more. In this blog, we will discuss a few of the mistakes that you must avoid on your US taxes.
Mistake #1: Not Filing an Income Tax Return
There is no doubt that expat make this mistake. While many expats end up paying no or little taxes on their income across the globe, many are still needed by United States regulations to file a United States income tax return to report the income taxes to the Internal Revenue Service. You should file an income tax return with the IRS or internal revenue service if your income across the globe is higher than the filing eligibility listed below.
Income across the globe includes the following from all resources, both non-United States and the United States: Interest, rental income, salary, Wages, dividends, gambling winnings, retirement income, capital gains, income from a trust or partnership, social security income or SSI and any other income that is generated during the financial year usually the calendar year. All income should be reported to the internal revenue service, even if it is not at all taxable in your resident country.
Let us know the filing eligibility for the taxable year:
Filing Status Age Minimum Self-Employment Income needs Minimum W-2 Income Requirement.
Single Under 65 $400 $12,400
Head of Household Under 65 $400 $18,650
Single 65 or older $400 $14050
Married Filing Jointly Both Spouses Under 65 $400 $24800
Head of Household 65 or old $400 $20300
Married Filing Jointly (One partner) 65 or older $400 $26100
Married Filing Jointly (Both partner) 65 or older $400 $27400
Qualifying Widow(er) with dependent kids under 65 $400 $24800
Married filing separately At any age $400 $5
Qualifying Widow(er) with Dependent Children 65 or older $400 $26,100
When you file an income tax return with the IRS or internal revenue service, it does not mean that you will be paying United States taxes on your earned income. There are various tax provisions that help you to exclude all or most of your income from taxation and other credits of taxes that allows you to decrease your United States income tax to zero using the income taxes you have already paid to your resident nation.
It is vital to note that minor kids are not at all exempt from filing United States tax returns. If there is a minor kid who has income from any resource that exceeds the filing criteria, they have to report this income on a United States income tax return. The guardian of the kid or parents has to ensure that the minor child’s return is filed properly.
When you file your income tax return, it means that it opens you up for specific tax credits that may help you to get a refund from the internal revenue service.
Mistake #2: Not using the Foreign Tax Credit or FTC in conjunction with the FEIE or Foreign Earned Income Exclusion
If you use the FEIE or foreign earned income exclusion to decrease your income tax, you might be able to use the FTC or foreign tax credit too. The Foreign earned income exclusion or FEIE assists in decreasing your income that might be taxed. If the income amount exceeds the Foreign earned income exclusion or FEIE ($108,700 in 2021 and $107600 in 2020), there is a probability that you might generate United Taxes on your excess income. If you stay in a nation with an income tax, you can use the taxes that you paid on your income in your resident nation to decrease your liability for United States taxes.
You can use the Foreign taxes attributed to the income that is not excluded.
- You file a United States income tax return and exclude $107,600 of your income by using the FEIE or foreign earned income exclusion.
- The foreign taxes amount you may be available with you to use on your United States income tax return is $23,100.
If there are excess FTC or foreign tax credits that your United States income tax is less than the amount of FTC or foreign tax credit you have available for the year, you may carry forward the credits to be used in the coming financial year.
Mistake #3: Ignoring FBAR and FATCA filings
FBAR and FATCA filings are among the common omissions that are made by non-expats and United States expats.
FATCA means foreign account tax compliance act that became law in 2010. The provision of tax targets tax non-compliance by United States income taxpayers with foreign accounts. It concentrates on the reporting of offshore foreign properties and financial accounts. If you have any foreign financial accounts such as mutual funds, bank accounts, retirement accounts, or other properties (bonds and stocks) with a total that exceeds the chart, then you might have to file form 8938 with your United States income tax return.
The eligibility criteria for FATCA are as follows:
Staying in the United States
Filing status Balance at any point during the year Balance on 31 December
Head of Household/Single $75,000 $50000
Married Filing Jointly $150000 $100,000
Married Filing Separately $75000 $50000
Living in the US
Staying outside the United States of America
Filing Status Balance at any point during the year Balance on 31 December
Head of Household/ Single $600,000 $400,000
Married Filing Separately $300,000 $200,000
Married Filing Jointly $600,000 $400,000
If you don’t need to file a United States income tax return, you don’t have to file Form 8938
When comes to FBAR is a part of the Bank Secrecy Act, enacted in 1970. The Filing needs you to file Form 114 FinCen, also named the FBAR. Every calendar year, you have foreign financial accounts whose aggregate balance exceeds $10,000 at any point of time during the year. This form 114 is filed separately from your income tax return and is needed if you don’t require to file an income tax return.
All bank accounts that the income taxpayer has their Name on it has to report on Form 8938 and FBAR. It includes joint accounts owned by children, relatives, spouses, non-relatives, and also bank accounts that the income taxpayer has signature authority over it.
The FinCen 114 and form 8938 have similar details, so you must keep up with the Filing that does not necessarily need any double effort. Both forms may ask you for the following details that include:
- Address and Name of the financial institution
- Address and Name of any joint owners
- Account number
- Financial account/ Highest Balance of your bank during the income tax year
As it relates to minors, Form 8938 and FBAR don’t have any age limit. If a United States individual minor kid owns a bank account either alone or jointly with a family member and the Balance exceeds the income tax filing criteria for the form, the minor kid has to file. The legal guardian or parent is responsible for ensuring that the form is filed on time every year.
There are severe fines for not complying with the income tax filing needs of FinCen Form 114 (FBAR) and FATCA. These fines might be a hefty penalty of $10,000 a year for every form for failure to file. Additional fines might be assessed for not filing if the FinCen/IRS starts sending you any notices.
Mistake #4: Not taking allowable credits/deductions
As you stay in a foreign nation, you don’t have to eschew the advantages that the income taxpayers staying in the United States do. There are several types of credits and deductions that might assist in reducing your United States income taxes or even provide you with a refund.
The distinction between deductions and credits is this: A credit is a dollar-for-dollar reduction of taxes, while a deduction is a reduction in your income that is taxable. Everything else is equal, and a tax credit might provide you a greater tax advantage on your income tax return than a deduction amount.
The common kinds of deductions you may take that most expats do not include:
- Student loan interest: The interest amount paid on a student loan taken for funds paid to an eligible institution. The cost might be up to $2500 every year! Taxpayers who come in the criteria as Filing as married Filing separately do not become eligible for this deduction
- Alimony paid: Alimony paid under a particular court decree/order to a former partner.
- Housing expenses: It is perhaps a huge deduction not taken by expats. When you claim the FEIE or foreign earned income exclusion, you might be able to increase the exclusion amount by the housing expenses you paid. The expenses include property taxes or equivalents, rent, utilities that do not include television or internet service, personal property insurance (renters or house owners), and repairs. The deduction might be as much as more than 30 percent of the FEIE or foreign earned income exclusion. Also, the expenses of housing should be paid from employer-provided funds from your employer or can be paid from your salary.
- Property taxes and mortgage interest: Mortgage interest is the interest that you pay on an eligible home loan for your primary home or a vacation asset (second home). You may also deduct the amount of real estate tax or the equivalent on your primary or any property or asset held for personal use.
- Moving expenses: Do you have to shift to work? You can take a deduction of the costs to shift that includes commutation of your storage fees for a month, household goods, cost of rental trucks, airline cost for you and your family that includes pets, packing materials, and cost of boxes and so much more. If you take the FEIE or foreign earned income exclusion, your deduction for shifting expenses might be limited.
- IRA contribution deduction: When you contribute to a United States-based IRA or Individual retirement arrangement, you can take a deduction of up to $5,500 on your United States income tax return
- Charitable contributions: You can take a deduction for contributions that include property and cash to an eligible charity. Many eligible charities have to be affiliated with or United States charity for the contribution to be deductible on your United States income tax return.
The common kinds of credit that expats miss are:
FTC or foreign tax credit
It is dollar for dollar reduction in your United States taxes depending on the taxes that you pay to a foreign nation. The credit aids to keep your income from being taxed double.
If your dependent or you attend an eligible institution, you can claim up to $10,000 of the tax credit, a few of which might come back to you in the type of refund. Also, an eligible institution might include any institution that participates in the United States Federal Student Aid program and may offer you form 1098-T that reports the amount spent on fees and tuition.
The Child Tax Credit and Additional child tax credit
The CTC or child tax credit is up to $1000 for every kid and results in a refund for you. Also, the additional CTC or Child Tax Credit is a refundable amount of the CTC. When you claim the FEIE or foreign earned income exclusion, you can be ineligible for the additional CTC or child tax credit. The Child tax credit is able to be claimed when you have US individual kids dependents on your income tax return (under 17 years during the taxable year). The credit may get modified depending on the Filing and income status. You must determine all options to calculate your income tax return to check if claiming the CTC may be beneficial to you!
Dependent and Child Care Credit
When you pay for childcare so that you may go to school or work, you can take a credit of up to $600 for every kid.
Mistake #5: Not Claiming the Right Filing Status
Your income filing status is used to consider your filing needs, credits, deduction, and tax rate. The primary factor to consider in your filing status is your marital status. It doesn’t matter if you are married or not on the last day of the financial year either to a non-resident or United States individual) is a vital element. Here is the various filing status you may select from. If you become eligible for more than one filing status, you may prefer the one that gives you the most output:
- Married Filing Jointly: You and your partner can club your deductions and income onto one tax return. Both individuals should have a United States income taxpayer identification number or ITIN (Social Security number). The filing status includes the lowest tax rates and highest standard deductions.
- Married Filing Separately: Your partner and you can file income tax returns separately. If only one spouse is a United States individual and other non-United States, individuals don’t have to file a US income tax return (unless there are other things that are not covered here), and their income must not be reported on the United States individual spouse’s US income tax return. The filing status carries similar tax rates and deductions as the single filing status.
- Head of Household: You are considered unmarried or married for tax reasons, and you may pay more than half the support of an eligible United States individual dependent. The income tax filing status is unique for expats in that they might be considered unmarried if they have a non-resident partner who has no independent filing needs with the internal revenue service, even if the partner stays with you for the complete financial year.
- Single: You are legally not married on the final or last day of the financial year. You have no US individual dependents. The income tax filing status carries the highest tax rate and lowest standard deduction.
- Qualified Widower: If your partner died within the last three tax years. Now, you have a dependent United States individual kid, and you may use the status of an eligible widower. The status carries similar advantages as the married Filing jointly income status but without the spousal needs.
Several expats don’t even consider that they have to claim the married Filing separately filing income status as they are married to a non-resident alien of the United States. It is the biggest error related to filing status on income tax returns.
Another common thing made is when a United States individual files as married, filing separately when they become eligible as head of household. When you have dependent kids for which you might pay more than half of the support, you may become eligible for the income status.
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