By David McKeegan
If you are a new expat, new to filing US taxes abroad or filing on your own for the first time, here are the 5 things you need to know!
- The Foreign Earned Income Exclusion isn’t automatic
Most expats use the Foreign Earned Income Exclusion to reduce or eliminate their foreign income from US taxation. Not only must you qualify to be eligible to use this valuable exclusion, you also need to elect it using Form 2555 or 2555-EZ.
Once you elect it, you don’t need to do so each year. However, if you choose not to use it in a future year, you must officially revoke it. You do this by attaching a statement that you are revoking it and do not wish to claim the exclusion. You must specify which choice(s) you are revoking, as you can revoke just the Foreign Earned Income Exclusion and/or the Foreign Housing Exclusion. You must revoke each separately.
If you revoked a choice and within five tax years again wish to choose the same exclusion, you must apply for IRS approval—which may or may not be granted. You do this by requesting a ruling from the Internal Revenue Service. The IRS will consider your period of residence in the United States, a move from one foreign country to another foreign country with different tax rates, a substantial change in the tax laws of the foreign country of residence or physical presence, or a change of employer.
- Obamacare may — or may not— impact you
Expats are understandably confused about how Obamacare (or the Affordable Care Act) may impact them while they live abroad. If you qualify for the Foreign Earned Income Exclusion or you have a US expatriate health plan, you are currently exempt from the plan’s provisions. If you do not, you will need to pay a ‘shared responsibility payment’ — essentially a penalty tax on your US Federal Tax Return.
If you are returning to the US, you will then need to choose a US health plan that satisfies the ‘minimum essential coverage’ as outlined by the plan. You’ll have three months to find a plan, as moving back to the US is considered a qualifying event.
Remember that you are considered covered for the month if you hold coverage for even one day.
- The Foreign Tax Credit can help you save more
Most expats assume the Foreign Earned Income Exclusion is clearly the best way to save on US taxes. However, sometimes the Foreign Tax Credit can actually save you more! If you live in a high-tax country, in particular, you can use the Foreign Tax Credit as a dollar-for-dollar reduction in the taxes you pay to the US.
And the best part? If you paid more in taxes to your foreign county than you would owe to the US, using the Foreign Tax Credit allows you to ‘carry over’ those credits for up to ten years and apply to future tax returns. You can also carry these credits back one year and if it would help you save more on last year’s tax return, you can file an amended return and apply the available credits.
- You can file an extension if you don’t yet qualify for the Foreign Earned Income Exclusion
If you moved abroad towards the end of the year, you may not yet qualify for the Foreign Earned Income Exclusion when tax time rolls around June 15. But that doesn’t mean you will be forced to pay taxes on both your US and foreign earned income! An extension filed prior to June 15 will give you until October 15 to qualify and file.
Should you still not qualify by that time, you have the option to file Form 2350, Application for Extension of Time to File U.S. Income Tax Return. You can only use this form if you expect to file Form 2555 or 2555-EZ and need time to meet the Bona Fide Residence test or the Physical Presence test. This is not the form to file if you just don’t have time to gather your documents by the June 15 deadline.
- FBAR must be filed by June 30
US expats will likely need to file FBAR, Foreign Bank Account Report. FBAR is part of the US initiative to thwart tax cheats hiding money overseas. If the aggregate balances of your foreign bank accounts exceed $10,000 at any point during the year, FBAR must be filed. This filing requirement is triggered even if your total account balances hit $10,000 for one day—or one minute!
FBAR is filed electronically to the Department of the Treasury by June 30 each year—and no extensions are possible. Penalties for failing to file when required can be steep so we highly recommend you file. If you aren’t sure if a certain account must be reported, contact an expat tax professional who can help you determine that. When in doubt, file it!
It certainly can’t hurt to report an account, even if you aren’t required to do so. But it can be a large problem if you don’t report an account that you should!