Ah, filing expat taxes…one of the necessities of living overseas. While it may not be the most enjoyable thing about your adventure abroad, fortunately the IRS provides a number of ways to avoid double taxation so you can save money come tax time.
Here we highlight the top credits, deductions and exclusions to use that will help you save big when filing your US tax return.
Take Advantage Of The Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is one of the best ways expats can save on taxes, as it allows you to exclude the first $101,300 of foreign earned income from your 2016 tax return (and $102,100 for 2017 taxes). In order to take advantage of the FEIE, you must pass one of two residency tests:
- Physical Presence Test: You must live abroad for 330 out of a 365-day period. This does not have to be a calendar year.
- Bona Fide Residence Test: You must live outside the US for a full calendar year, with no intention of returning to the US to live in the foreseeable future. You must also show that you’ve established a residence in your host country.
Use the Foreign Tax Credit To Save Big
Another great way to save money on your expat taxes is with the Foreign Tax Credit (FTC), as it provides a dollar-for-dollar reduction of US tax liability on your foreign earned income. While you can’t take the FTC on income you’ve already excluded with the FEIE, you can use it on income above the FEIE limit or alternatively, in place of the FEIE entirely. It would be beneficial to discuss your options with an expat tax professional to ensure you choose the best option(s) for your tax situation.
In order to use the FTC, you must have:
- Foreign tax liability that was paid or incurred
- Tax assessed on income
- Tax imposed on you as an individual
- Tax originating legally in a foreign country.
A benefit of the FTC: you can carry the credit back or forward if the credit is larger than your US tax liability for the year. So, you could carry the credit back to the preceding tax year to gain a refund, or you can carry it forward for up to ten years to offset future tax years’ liability.
Consider The Foreign Housing Exclusion
Often, the costs of living outside the US can be higher, so the Foreign Housing Exclusion helps offset that. Working in conjunction with the FEIE, the Foreign Housing Exclusion helps reduce your income by using housing expenses you’ve paid to increase your FEIE for the year (effectively lowering your income).
To use the Foreign Housing Exclusion, you must:
- Qualify for and claim the FEIE
- Have qualifying foreign housing expenses (rent, certain utilities, insurance, furniture rental, etc)
- Have paid your housing expenses from employer-provided funds (can be designated funds or part of regular salary)
- Have housing expenses that exceed the base amount specific to your location (base amount is currently 16% of the FEIE).
Filing Your Expatriate Taxes
In addition to the three ways above that help you save on your expatriate taxes, filing as close to the first deadline as possible (which was 18 April this year) can also help you save big if you will owe taxes to the IRS. This is because any tax owed was technically due on 18 April and began accruing interest from that day forward. So, if you haven’t already, now is the time to get started in order to avoid paying more than you have to toward your expat taxes.