Are you a US expat planning to move abroad or residing overseas? If yes, you should know about US tax filing in 2024. For this, USTAXFiling.in has ensured to make a list of facts about US expat taxes that you must know. So, stay tuned and get the most important income tax filing updates for 2024 now!
Are you a US expat who wishes to move to another country or want to reside overseas? If yes, you must understand how the US income taxes Americans. To aid you know the regulations, we have made a straightforward list of the facts. Tax needs are difficult for US expats and even more so for citizens of the United States residing abroad.
Let us begin now!
Major Takeaways
·It does not matter where you reside across the globe, US expats should file a US federal income tax return, several expatriates are not aware of this.
·If not meeting any complex need for US expat taxes- or not filing at all, it might result in huge charges. If you are in doubt, you may ask an expat Enrolled Agent or CPA
·Tax deductions and credits such as the Foreign tax credit and Foreign earned income credit may aid expats in eliminating or decreasing their US income tax bills.
Expat Tax Filing Requirements
Expats have to file a US income tax return. We may ask a tax expert or CPAs get asked all the time:
Do Americans have to file US income taxes?
The answer is yes! Every citizen in the United States should file a US federal income tax return as long as their income exceeds the income tax filing threshold. Your income tax filing status determines your income tax filing eligibility. If your income does not meet this eligibility, you might have to file- for instance, to claim specific income tax credits, to get peace of mind, or to get a refund.
Many Americans Don’t Have to Pay US Income Taxes
The majority of Americans should file an income tax return and many of them don’t end up owing expat income taxes. Also, to become eligible for these income tax benefits, you should meet specific standards. Many exclusions, credits, and deductions make sure that US expats residing overseas don’t have to pay income tax twice on the same income.
You Have to File A State Income Tax Return While Residing Overseas
Things might get difficult for Americans at the state level. Whether you are a resident or where you reside, you have to file a state income tax return after moving overseas. The rules for considering residency differ from one state to another and they might impose income taxes. Few states make it hard to remove yourself from income tax jurisdiction. To impose tax, they consider the following:
·Your car is registered there
·You registered to vote there
·You have a kid or spouse residing there
·They issued your ID card or current driver’s license
·You maintain a mailing address there
·Use a relative’s or friend’s address
·You have a bank account open there
·You registered to vote there
·You have a property
That being said, several states decide you as a non-resident once you shift overseas. Another fact to consider is expats who don’t know the ramifications of owning a business or rental properties. You should file a state income tax return if you earn income from the state.
How to Save on Your US Expat Taxes
Eliminate or decrease expat taxes with the foreign-earned income exclusion. US expats may take benefit of many income tax benefits. Foreign-earned income exclusion allows you to exclude a specific amount of foreign-earned income from US income taxation. The amount you will exclude increases every year as inflation increases. The maximum exclusion amount is $1,20,000 for the financial year 2023 and if you and your spouse both are married you are eligible for $120,000 for a total of $240,000.
You should pass the bona fide or physical presence of residence to become eligible:
·Bona fide residence test: You lived abroad for a minimum of one year and you don’t intend to move back to the US soon
·Physical Presence test: You should be present inside a foreign nation for 330 days out of 365 days.
You may claim the foreign earned income exclusion by including the 2555 form in your US expat income tax return. Also, you must consider whether you want the exclusion, you cannot claim it for the upcoming fixed years unless you get certified from the Internal Revenue Service.
Pro Tip
Passing both the bona fide residence and physical presence test requires spending a specific amount of time abroad. If you spend more days in the United States or if you cannot prove how much time you stayed in another country, you might miss out on the foreign-earned income exclusion. This one mistake might cost you thousands of dollars on an American expat income tax return.
The Foreign Tax Credit is another way to reduce Your American Expat Taxes
Americans may also use the foreign tax credit to eliminate or decrease their taxes. It is a dollar-for-dollar credit depending on foreign income taxes that you have accrued or paid. For instance, let us consider that you pay more than $150,000 in foreign taxes. When you prepare a US income tax return, you find that you have to pay $20,000. The foreign tax credit of $15,000 might reduce your US income tax bill to $5000. You might owe nothing if your foreign income is higher than what you have paid in US taxes.
You should file an 1116 form to claim the foreign tax credit. You must consider the Internal Revenue Service won’t allow you to ‘double dip’ by using both the foreign tax credit and foreign earned income exclusion for similar income. Also, Americans may use one expat tax exclusion, credit, or exemption for income and you might use a different one for the remaining income. One of our tax experts will aid you find the best strategy for your case if you are unaware of using the foreign tax credit or foreign earned income exclusion. You may schedule a consultation and one of our income tax experts will assist you find the best strategy.
Americans may decrease their income taxes through foreign housing exclusion
The foreign housing exclusion helps Americans to deduct foreign housing-related costs from the US income tax bill.
You might have the following expenses that become eligible:
·Repairs
·Homeowners Insurance
·Utilities
·Rent
·Parking charges near your house
Also, you may claim the foreign housing exclusion if you also claim the foreign earned income exclusion and use the 2555 form for both.
American Parents May Claim the Child Tax Credit
US expats with dependent kids who are permanent residents or citizens of the United States have eligibility for the child tax credit. It provides parents credit of $20,000 for every eligible kid. This child tax credit also offers a great advantage. Americans who meet the income limits may get up to $1500 for every kid as an income tax refund.
You might deduct childcare expenses using the dependent and kid care credit. You should have earned income to use this credit, for instance, wages or salaries and if you exclude your income with the foreign earned income exclusion, you cannot use this income tax credit.
Pro Tip
For income taxpayers who may claim the child tax credit using the foreign tax credit instead of foreign earned income exclusion may provide better yield on overall tax savings.
Income tax treaties aid to prevent double taxation for Americans
Income tax treaties assist in preventing double taxation for Americans. Americans have income tax treaties with 69 countries. These tax treaties decrease double taxation by stating which country has the right to tax an American. Many US tax treaties include a saving clause that protects every nation’s right to tax its citizens as if the tax treaty didn’t even exist. Also, several income tax treaties will offer options to decrease income taxes for Americans.
Expats in the United States with such treaties cannot use income tax treaty benefits to entirely reduce their US income tax bills. Also, several tax treaties may offer options to decrease income taxes for expats. You may even hire a tax consultant to figure out what are your options.
Renouncing US citizenship might not Assist You Eliminate US Income Taxes
Are you frustrated with income tax filing needs or what to pay in taxes, some Americans also consider renouncing citizenship. Based on your net worth and income, you are subject to an exit tax when you renounce. There are many catches that you should be aware of. Before you give up citizenship in the US, you should prove that you have met US tax needs for a minimum of five years. It implies if your net worth exceeds more than $2 million. Few Americans may continue to file US income tax returns after expatriation, especially those who earn income in the United States. They also pay a minimum 30 percent income tax rate on that income.
Filing Income Taxes as an American
Expats get an automatic income tax filing extension until the 15th of June. Though Americans have the same tax deadline as income taxpayers residing in the United States- 15th April that deadline extends to June if you miss it. Also, to eliminate interest and charges, you should pay income tax by the original deadline. Americans may request an additional extension by filing Form 2350 or Form 4868. The right form is based on your certain needs and situation.
Failing to file may result in major charges
Many Americans should file an income tax return each year, the same as US expats residing in the United States. There is no such surprise. If you have to pay income tax and fail to file an American income tax return, you might incur charges and late charges for each month your income tax payment is late. The longer you wait to fail to pay income tax, the more severe the repercussions may be. The Internal Revenue Service is well-recognized to revoke the citizens of US passports who owe income tax and press any criminal fees that might result in jail time. Looking for the best option to avoid any trouble? You may work with an American tax expert to file your income taxes on time and pay what you owe.
You May Use the Streamlined Filing Compliance Process to Catch up on Income Taxes
Years after moving overseas, several Americans explore that they do have US income tax filing needs. Also, the Internal Revenue Service has created a streamlined process of filing compliance, an amnesty program that allows delinquent Americans to catch up without facing any charges.
To take benefit of this program, here is something that you should do:
·Pay delinquent income taxes owed with interest
·You should file a foreign bank account report for the past six years
·You should self-certify that your failure to file was not a willful refusal but was an accident
In several cases, these steps may bring you into compliance with Internal Revenue Service rules, which is a great relief for Americans who are unaware of their income tax filing obligations.
You Might Amend A Past US Income Tax Return If You Made Any Mistake
Mistakes might happen. The Internal Revenue Service gets that and if you or even your tax consultant finds any mistake, you might file an amended income tax return for the financial year using the 1040-X form. It implies income you failed to report and even the deductions that you didn’t take.
Additional Reporting Needs for Americans
If the combined balance of a foreign bank account is more than $10,000, you should file a FinCEN 114 form called a foreign bank account report. It also implies if your account passes more than the $10,000 threshold for a day during that financial year. The initial deadline for the foreign bank account reporting is the same as the one for filing income tax returns but with the foreign bank account reporting you will get an extension to 15th October. When you calculate your Foreign bank account reporting liability, you must include foreign bank accounts that include investments, bank accounts, and pensions that you don’t own but have authority over like your relative or parent.
You Can File A FATCA Report
Citizens of the United States who own foreign properties under the Foreign Account Tax Compliance Act valued above particular eligibility should file an 8938 form, better called a FATCA report. Your residency and income tax filing status decide your value eligibility. FBAR and FATCA filing needs are the same but separate. Based on your current scenario, you have to file one or both of them.
Social Retirement and Security
You might get social security benefits when you retire overseas. If you are a US individual who is determining overseas, you may collect your social security benefits. Only a small number don’t permit US expats to collect advantages:
·Moldova
·Kazakhstan
·North Korea
·Uzbekistan
·Cuba
·Kyrgyzstan
·Belarus
·Azerbaijan
·Uzbekistan
·Tajikistan
·Turkmenistan
Also, you may collect back payments once you shift to another nation. For instance, when residing in Havana, you may not get US Social Security payments. After a few years, you move to Costa Rica or Liberia, you may collect the payments you missed out on in Cuba.
Totalization Agreements Consider Which Country You Pay Social Security Taxes
Totalization agreements are available in the US in 28 countries. These totalization agreements stipulate which party gets your Social Security income tax payments.
Many of these agreements will aid you in using the credits you earn in one country to calculate the advantages you get in another. This works in your favor and without any such agreement, you can pay for social security in two countries while getting only one benefit!
Tax Situations and Special Cases
Selling and purchasing foreign real estate creates implications on tax. The tax regulations for selling and buying foreign assets are the same as the ones for selling and buying property in the United States.
·If you sell personal residence at a loss, you don’t have to report the sale
·You don’t have to report any purchase of foreign real estate
·If you sell for a profit, you should report it and you are subject to a capital gains tax
As for the rental property sale, you should report whether it might result in a loss or gain. You should also report rental income on your yearly income tax return.
American Entrepreneurs Must Pay A Self-Employment Tax
Apart from income taxes, self-employed Americans should also pay the self-employment tax while residing overseas. This 15.3 percent income tax replaces the Medicare income taxes and Social Security taxes in an employee-employer relationship and foreign tax credit or foreign earned income exclusion will not offset it. Also, other American tax benefits will still aid you reduce your US income tax bill.
Prop Tip
The business entity structure affects your income tax liability. For instance, corporations and LLCs should meet different needs. A US expat consultant may aid you in navigating those needs.
Digital Nomads should follow the regulations as other Americans
Most of them are self-employed and digital nomad income taxes are the same as those of other Americans. Digital nomads travel from one place to another and remotely work.
·Self-employed digital nomads should pay self-employed income tax
·Digital nomads might claim other expat tax advantages if they are also eligible
·All digital nomads should file a US federal income tax return
·Few might have to file a state income tax return
Also, traveling from one place to another without setting a domicile has unique implications for tax that might complicate the American tax process. An expertized tax professional will assist you in knowing and meeting your income tax obligations.
The Next Steps for Your US Income Taxes for Americans
Now that you understand the ins and outs of American income taxes, you may complete these steps to reduce your income tax bill and remain compliant:
·Consider now how you may keep a track record of all these tax-related updates yearly
·Know your income tax filing needs and make a plan to fulfill them
·If required, use the process of Streamlined Filing Compliance to catch up on expat income taxes.
·You can file a US federal income tax return and also any expat income forms every year.
·You may keep yourself organized will make it easy for you to file them on time.
·Several Americans choose not to manage this process alone. Also, they work with an eligible US expat CPA.
They might aid you in filing your Americans correctly and on time and with USTAXFiling.in, you pay a flat charge with no hidden charges. Several USTAXFiling Enrolled Agents are expats themselves and they reside in 14 different timezones. They have the patience and knowledge to aid you navigate the difficult US tax system and your local regulations. Our talented team of specialists helps expats with income tax filing. If you have any queries, you don’t have to worry, USTAXFiling experts are there to assist you anytime. So, schedule a call with USTAXFiling right away!