Use This Time in Quarantine to Make Some Tax Savings
All Americans, including those who live overseas, are required to file U.S. taxes, reporting their worldwide income. This is because U.S. taxes are based on citizenship rather than on residence.
Filing U.S. taxes from abroad is more complicated than doing it back home, as it typically involves more forms to file, currencies to convert, and foreign bank and investment account reporting.
With coronavirus quarantine orders currently in place in many countries, American expats can benefit from taking some extra time to ensure that they are filing to their maximum benefit this year, and possibly make some savings.
U.S. Tax Rules for Expats
Expats normally have more time to file, until June 15. This year, in line with all Americans though, they have until July 15. Expats who require further time (perhaps because they need to file foreign taxes first) can request an extension until Oct. 15 through IRS Form 4868.
As well as reporting their global income, expats who have over $10,000 in total in overseas registered financial accounts, including bank, investment, business, and pension accounts, at any moment during the year, have to file a Foreign Bank Account Report (FBAR) to report them. Expats who have foreign registered businesses also have to report them to the IRS.
The simplest way for expats to save money is to ensure that they avoid U.S. penalties. This means ensuring that they file on time and completely.
The two most common penalties expats face are for not filing taxes on their worldwide income (especially over several years) and for not filing FBARs.
FBAR penalties are particularly steep, starting at $10,000 for unintentional non-compliance. It’s also important to note that Uncle Sam is receiving information directly from foreign banks and investment firms, so the U.S. government can check who should be reporting.
Expats who are behind with their U.S. tax filing from abroad can catch up without paying penalties under an IRS amnesty program called the Streamlined Procedure—so long as they do so before the IRS contacts them about it.
Paying Less U.S. Tax
Expats who pay foreign taxes can reduce their U.S. tax bill by claiming the U.S. Foreign Tax Credit on IRS Form 1116 when they file. The Foreign Tax Credit gives them U.S. tax credits to the same value as foreign taxes paid. For the many expats who pay higher rates of foreign taxes, this means paying no U.S. tax.
Some expats may be better off claiming the Foreign Earned Income Exclusion, however, which simply allows them to exclude the first approximately $100,000 of their earned income from U.S. tax.
As well as foreign tax credits, all tax credits available to Americans who live in the States are also available to qualifying Americans living overseas.
For example, expat parents (whose children have U.S. Social Security numbers) can claim the Child Tax Credit. Those who have already reduced their U.S. tax bill to zero by claiming the U.S. Foreign Tax Credit will receive a $1,400 per child refund each year.
The Recovery Rebate
The U.S. government has extended financial relief during the coronavirus crisis to U.S. expats, too.
This means that expats who earn up to $75,000 ($150,000 for married couples filing jointly) will receive $1,200 per adult, and $500 per child. Above these income thresholds, the payments gradually fall, until reaching zero at $99,000.
Seek Advice If Required
The most beneficial way to file from abroad depends on each expat’s circumstances, including their income levels and sources, where they live, their family situation, and how often they travel to the U.S. Therefore, the single best way for expats to save money when they file is to get clear information on all their options or seek advice from a U.S. tax specialist.
Allyson Lindsey is Partner and Managing CPA at Bright!Tax
Written by Allyson Lindsey