Generally, US taxpayers living abroad as Expats have access to the same exemptions, deductions, and credits like citizens living in the United States. Expats also have access to the Foreign Income Exclusion that we discussed in a previous article. However there are some additional considerations for expats planning to file their taxes while living abroad.
Any income or expenses you claim for the foreign income exclusion cannot be used or claimed on any other related credits or deductions that can be claimed. Example: you cannot use the housing expenses you claimed on the foreign housing exclusion as a deduction.
Exemptions can be claimed for your children born abroad, so long as you are a US citizen at the time your child was born, even if your spouse may not be a non-citizen.
Charitable contributions made to foreign charities are generally nondeductible. There are some exceptions for some Canadian, Mexican, and Israeli charities due to certain tax treaties.
Moving expenses may be deductible if the expenses incurred are related to your work at a new location.
If you pay taxes to a foreign country, you may be eligible for an income tax credit based on the amount you pay to a foreign country.Use IRS Form 1116 “Foreign Tax Credit” to figure the amount of foreign tax paid to determine the credit.
If you chose to not claim the credit, foreign income taxes can also be taken as a deduction instead. Report it as a deduction on your schedule A for your 1040 Form.
The United States has negotiated many tax treaties with other countries. Under these treaties, US expats are entitled to certain credits, deductions, exemptions, and other options to assist their tax liabilities. For more specific details, the IRS website provides details on these treaties and what can be claimed.
Hopefully you found this info for expat taxes informative. As complex as the tax code can get here in the states, just imagine how complex each person’s taxes can get if they live abroad! We here at MiklosCPA, a SoCal CPA firm, have knowledge and experience in helping expats and foreign nationals plan and properly prepare their taxes for compliance with the IRS. If these articles have piqued your interest, please do touch base with us.
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MiklosCPA works with US Citizens and permanent residents across the globe when it comes to tax time. This is why our accounting practice is a listed expat advisor on many of the US Embassy websites abroad.
More than ever, many US citizens are taking their lives, and often their businesses overseas. Understanding and navigating the income tax implications is a daunting task. The United States is one of the few countries imposing unique restrictions and reporting requirements to her citizens and their worldwide income; yes, we’re talking taxes living abroad.
If you are a US citizen and you lived in a foreign country during the past year, you may be taxed on your income even if none of it was earned in the USA. But there is some good news! If you lived abroad long enough, you may qualify for the Foreign Earned Income Exclusion and for certain Foreign Housing Exclusions and Deductions as well. The IRS recognizes that being a bona fide resident of another country, you can claim income exclusion of up to $102,100 for 2017.
For example, let’s say you are a US Citizen doing business in China as a self-employed consultant for most of the last year. You earned $90,000 for your consulting services and your business deductions were $20,000. This will result in a net profit of $70,000. If you qualify for the Bona Fide Resident Test and lived in China for most of the year you may qualify for the Foreign Earned Income Exclusion (Form 2555) and have the $70,000 excluded from US taxable income when you file your IRS Form 1040. That’s a great savings! (You may have to check if your income earned as a consultant will be subject to self-employment tax even when it is earned abroad.)
Do not forget about the other reporting requirements such as FATCA and FBAR. Remember, filing an incorrect or incomplete US return will not save you from interest and penalties.
Which forms are you required to file and when are the taxes due? The CPA practice of MiklosCPA is here to answer these questions and address other tax related challenges while you enjoy working in another country and building your business.
Contact MiklosCPA for assistance with determining if you qualify for this, or any other, tax saving exclusion. We provide solutions to your problems and help you plan to save the most of your hard earned money in the present and future years, whether you are doing business at home or filing your taxes living abroad.
If you enjoyed reading our tax tip, please share our article with your expat friends on Facebook or Twitter, and help them with their questions!
The United States may be one of a handful of countries in the world that requires its citizens living abroad to file their taxes, but the federal tax code allows some relief for Americans living and working abroad. Depending on your income and the way that income was earned, you may qualify for the Foreign Earned Income Exclusion, which is worth up to $100,800 for a single filer ($201,600 for married, filing jointly). The tax savings may be potentially very beneficial if you qualify to be able to exclude a portion of your income from federal income tax.
How to qualify
There are 3 general requirements to qualifying for the Foreign Earned Income Exclusion:
1. Your tax home must be in a foreign country (or within its territorial waters).
2. You must have foreign earned income.
3. You must be a bona fide or physically present resident of a foreign country.
A ‘tax home’ generally implies the main place you will conduct your work. It does not necessarily mean where you reside.
‘Foreign Earned Income’ is specific in that it means your income from abroad must be earned (e.g. wages, tips, professional fees), and not passive income (e.g. rental income, interest income).
“Bona fide” and “physically present” resident status are very specific requirements the IRS defines based on the amount of time you stay in a foreign country. While the IRS ultimately decides the status based on the information provided in the required Form 2555, “bona fide” resident status generally means an uninterrupted residence in a foreign country for at least an entire tax year.
The “Physically Present” test is based on how long you stay in a foreign country, and does not consider the nature of your stay or if you have residence there. The requirement to meet it is be physically present in a country for at least 330 days during a 12 month period. Let’s look at a two examples:
Jeff works for a Torrance-based oilfield services company on an oil rig off the shores of California in waters considered part of Mexican territory. His work schedule is a 14-days working/14-days off shift, as is typical for those in that industry. However, he does not qualify for the foreign income exclusion because he is not a ‘bona fide’ foreign resident, he still regularly goes home on his off time to his home in Long Beach. He also does not meet the “physically present” test.
Terry works for a multinational accounting firm based in El Segundo, CA. His firm appoints him to develop a business unit for
the European market. He moves himself and his family to London, United Kingdom, starting May 2015. While residing there, Terry rents out an extra room in his townhouse to a student. In December, his managers feel it would be better to develop the European division from a more centralized location in Frankfurt, Germany.
Terry and his family move there next. By June of 2016, Terry’s managers determine he has adequately developed their European division and his work abroad is done for now, so he moves himself and his family back to El Segundo.Terry and his family qualify as ‘bona fide’ residents of a foreign country because of his uninterrupted stay abroad. However, the income he earned from his
rented room in London will not qualify for the Foreign Income Exclusion because it was passive income.
Foreign Housing Exclusion and Deduction
In addition to the foreign income exclusion, expats have the option of claiming an exclusion or a deduction from gross income for your housing costs if your tax home is in a foreign country. The amount you can claim is determined by the
total of your housing expenses minus the base housing amount, which is calculated as 16% of the exclusion amount on a per day basis on the number of qualified days living abroad. However, you can only claim either the housing deduction or the exclusion. You cannot claim both for your filing.
Claiming the Foreign Income Exclusion
Complete Form 2555 (or Form 2555-EZ) and submit with your Individual income tax form 1040. Form 2555-EZ is a more simplified form whose main differences from Form 2555 are:
–No self-employment income for the year.
–No business or moving expenses for the year.
–Not claiming the foreign housing exclusion or deduction.
Hopefully this primer on the Foreign Income Exclusion wasn’t too overwhelming! There are a multitude of other individual factors to consider as an expat who is filing. However, we at MiklosCPA, a Los Angeles-area CPA firm, have knowledge and experience in helping expats properly prepare their taxes. If you are interested in learning more in how we can help, do not hesitate to get in touch with us via email.
MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
