Foreign Housing Deduction: A Guide For Self-Employed US Expats

Living abroad as a self-employed U.S. expat comes with unique financial benefits, one of which is the Foreign Housing Deduction. This deduction can significantly lower your taxable income by allowing you to deduct certain housing costs from your earnings. This guide will provide a clear and concise understanding of how the Foreign Housing Deduction works, who qualifies, and how to maximize your tax savings.

WHAT IS THE FOREIGN HOUSING DEDUCTION?
The Foreign Housing Deduction allows self-employed expats to deduct foreign housing expenses from their gross income. Unlike the Foreign Housing Exclusion, which applies to employer-provided amounts, the deduction is specifically for those with self-employment income. This can help reduce your tax liability and make living abroad more affordable.

WHO QUALIFIES?
To qualify for the Foreign Housing Deduction, you must:

Have self-employment income.
Have a tax home in a foreign country.
Pass either the bona fide residence test or the physical presence test for an uninterrupted period that includes an entire tax year.
Bona Fide Residence Test: You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. This means you must establish a residence in the foreign country and intend to live there for a substantial period.
Read More

Tax Home: IRS Definition And Implications

KEY POINTS OF IRS DEFINITION:

General Area of Business Activity: The IRS defines your tax home as the “entire city or general area” of your regular workplace or place of business, regardless of where your personal residence is located.

Multiple Workplaces: If you have multiple workplaces, your tax home is generally the location where you spend the most time and have the greatest business activity. For example, if you spend more time and conduct more business in New York compared to London, New York would be considered your tax home.
No Fixed Workplace: For those without a fixed workplace, such as itinerant workers or remote employees, your tax home may be the place where you regularly live. This can apply even if this location is not where you conduct the majority of your business activities.

Maintaining a Residence: To establish a tax home, you need to maintain a residence in that location and incur regular living expenses such as rent, mortgage, utilities, and other day-to-day expenses. Using a relative’s address or a nominal rental arrangement does not qualify as maintaining a tax home.

Travel Expense Deductions: The location of your tax home is important because it determines whether your travel expenses away from that location can be deducted as business expenses.
Distinction from Permanent Residence: Your tax home is distinct from your permanent residence or domicile. While your permanent residence is your long-term, permanent home where you intend to return, your tax home is your primary place of business or employment.
Read More

Using FEIE: Bona Fide Residence Test For U.S. Expats

The Foreign Earned Income Exclusion (FEIE) is a significant tax benefit for U.S. expats, allowing them to exclude a portion of their foreign-earned income from U.S. taxation, which is a crucial aspect of expat taxes. To qualify, expats must pass either the Physical Presence Test or the Bona Fide Residence Test. This article focuses on the Bona Fide Residence Test, providing updated information for 2024 and detailing everything you need to know to claim it.

WHAT IS THE BONA FIDE RESIDENCE TEST?
The Bona Fide Residence Test is a of two methods for American expats to qualify for the FEIE. To qualify, expats must pass either the Physical Presence Test or the Bona Fide Residency Test, which focuses on economic and social ties to a foreign country, uninterrupted residency, and subjective qualifications. This test is more subjective and often harder to pass, as the IRS scrutinizes your intentions and ties to the foreign country.
HOW DO YOU QUALIFY FOR THE BONA FIDE RESIDENCE TEST?

To qualify for the Bona Fide Residence Test in 2024, you must meet several criteria:

  1. U.S. Citizen or Resident Alien: You must be a U.S. citizen or a resident alien.
  2. Uninterrupted Period: Establish residency in a foreign country for an uninterrupted period that includes an entire tax year. This means that you must live in the foreign country for a continuous period that covers the entire calendar year.
  3. No Intentions to Return: Demonstrate that you have no immediate plans to return to the U.S. and that you have strong ties to the foreign country.
  4. Strong Ties: Establish strong connections to your foreign residence, such as employment, property ownership, family presence, and social ties.

Meeting these criteria helps determine if you qualify as a bona fide resident abroad for IRS purposes.

WHAT ARE THE COMMON PITFALLS?

Here are some common pitfalls to avoid:

Read More

IRS Form 1116: How To Claim The Foreign Tax Credit (With Examples)

When talking about US taxes and taxation of US citizens who live abroad, you may have heard of the Foreign Tax Credit. A U.S. citizen or resident alien who pays income taxes in another country can claim a tax credit against their U.S. federal income tax bill to avoid double taxation, ensuring they are not taxed twice on the same income. Double taxation refers to the situation where income is taxed both in the country where it is earned and again in the U.S. You can offset your US tax liability by claiming the foreign taxes paid to another country. This way, you can bring your tax owing down to zero.

WHAT IS FORM 1116 AND WHO NEEDS TO FILE IT?

You must complete Form 1116 in order to claim the foreign tax credit on your US tax return for foreign income tax paid. The form requests information about the country your foreign taxes were paid in, the value of foreign income tax paid, and the types of income.

Most of the US international tax experts prefer claiming a Foreign Tax Credit (Form 1116) on a client’s U.S. tax return rather than the Foreign Earned Income Exclusion

Read further to learn about how to file Form 1116 Foreign Tax Credit and why it is a better way to save money on your US expat taxes.

Related: Foreign Earned Income Exclusion vs. Foreign Tax Credit: which one is better? 

ADVANTAGES OF FOREIGN TAX CREDIT AND GENERAL RULES

Claiming the Foreign Tax Credit will not only bring your tax owing to zero, it will allow you to make tax-deductible IRA contributions, claim the additional child tax credit and carryforward those excess credits to future years. Individuals who pay foreign taxes may be eligible for significant benefits under the Foreign Tax Credit, highlighting the importance of understanding one’s legal obligations and opportunities when living abroad.

THE ADDITIONAL CHILD TAX CREDIT

Read More

IRS Form 8938: Reporting Requirements Overview

Living abroad brings its own set of adventures and challenges, especially when it comes to navigating U.S. tax obligations. If you’re an expat with a financial footprint across borders, you’ll need to familiarize yourself with IRS Form 8938, a key component of the Foreign Account Tax Compliance Act (FATCA).

WHAT IS FORM 8938?

Form 8938, titled “Statement of Specified Foreign Financial Assets” is a tax form required by the U.S. Internal Revenue Service (IRS) for taxpayers to report their specified foreign financial assets if the total value of those such foreign bank assets exceeds certain thresholds. It was introduced as part of the Foreign Account Tax Compliance Act (FATCA) to combat tax evasion and ensure U.S. persons are reporting their foreign income.

The form is filed along with the taxpayer’s annual income tax return, and the reporting thresholds vary depending on the taxpayer’s filing status and whether they live in the U.S. or abroad.

WHO NEEDS TO FILE IRS FORM 8938?

IRS Form 8938 must be filed by U.S. taxpayers (citizens, residents, and certain nonresidents) who have specified foreign financial assets exceeding certain thresholds. These thresholds depend on the taxpayer’s filing status and residency:

  • U.S. Residents:
    • Single or married filing separately: Assets over $50,000 on the last day of the tax year or over $75,000 at any time during the year.
    • Married filing jointly: Assets over $100,000 on the last day of the tax year or over $150,000 at any time during the year.
  • Non-U.S. Residents:
    • Single or married filing separately: Assets over $200,000 on the last day of the tax year or over $300,000 at any time during the year.
    • Married filing jointly: Assets over $400,000 on the last day of the tax year or over $600,000 at any time during the year.

    Even if the reporting thresholds are met, Form 8938 is only required if the taxpayer is required to file a U.S. tax return.

WHAT ARE FOREIGN FINANCIAL ASSETS?

Read More

Foreign Self-Employment Income: A US Expat’s Guide

Navigating the intricate world of expat taxes presents unique challenges and reporting obligations for self-employed U.S. citizens living abroad. Understanding the nuances of foreign income, tax treaties, and self-employment taxes is crucial for maintaining compliance with the IRS while optimizing financial health.

WHAT CONSTITUTES FOREIGN SELF-EMPLOYMENT INCOME?

Foreign self-employment income refers to the income earned by self-employed individuals who work outside of the United States. The IRS defines self-employment income as any income earned through a trade or business when you are a sole proprietor or a member of a partnership, and it includes income earned from side gigs or part-time businesses. Self-employment income is subject to self-employment taxes, which include Social Security and Medicare taxes, and self-employed individuals are required to pay quarterly estimated taxes in addition to filing an annual return.

WHAT IS THE THRESHOLD FOR REPORTING FOREIGN SELF-EMPLOYMENT INCOME?

If your net earnings from self-employment exceed $400, you are required to report this income on a US tax return. This income threshold applies to all self-employed individuals, including those working abroad, and encompasses your worldwide income.

WHAT IS THE U.S. SELF-EMPLOYMENT TAX RATE?

For the tax year 2023, US expats who are self-employed need to be aware of the self-employment tax rate that applies to their net earnings. The Internal Revenue Service (IRS) outlines that the total self-employment tax rate is composed of two parts: a 12.4% contribution towards Social Security and an additional 2.9% that goes towards Medicare. Collectively, this brings the self-employment tax rate to approximately 15.3% of your net profit.

Read More

United States Expatriates: Tips For Mailing Your Tax Return From Abroad

For US expatriates, navigating the process of submitting their annual income tax return to the Internal Revenue Service (IRS) can present unique challenges. While the convenience of electronic filing (e-filing) offers an efficient way to submit your federal tax return, certain conditions may require you to submit a paper tax return by mail. Understanding when and how to accurately mail your personal income tax return is crucial to ensure compliance with the IRS and avoid unnecessary processing delays.

WHY E-FILING SHOULD BE YOUR FIRST CHOICE FOR TAXES?

Before delving into the specifics of mailing your federal tax return, let’s first highlight the significant benefits of e-filing your personal tax return. The IRS encourages all taxpayers, including those residing abroad with foreign income, to file electronically due to several compelling advantages:

  • Quicker Processing and Refunds: E-filed income tax returns are processed more rapidly than paper filings, which means faster refunds. For expats anticipating a refund, this method significantly shortens the waiting period.
  • Enhanced Security: Submitting your federal return electronically provides a higher level of security than traditional mail, minimizing the risk of lost or intercepted sensitive information.
  • Immediate Confirmation: Upon successful submission of your e-filed return, the IRS provides immediate confirmation. This immediate feedback offers peace of mind, confirming that your tax obligations have been fulfilled on time.
  • Global Convenience: E-filing allows you to submit your federal tax return from anywhere in the world, requiring only an internet connection. This feature is especially beneficial for expats living in remote locations or those who frequently relocate.

However, despite these benefits, certain tax situations necessitate mailing a paper income tax return. Whether it’s due to specific IRS requirements for certain deductions or the need to provide supplementary documentation, understanding when you must mail your return is critical for US expats.

WHEN YOU NEED TO MAIL YOUR TAX RETURN?

Read More

Foreign Earned Income Exclusion for US Expats

Even if you’ve moved abroad for a brighter future, you still might have obligations towards the IRS. What happens if you earn income from sources outside the United States? If you live abroad, you might qualify for the foreign earned income exclusion (FEIE). This article explains what FEIE is and how it works, and provides some examples of situations where you might benefit from claiming it.

The U.S. retains its right to tax citizens and Green Card holders who live abroad and they must file their taxes even if they’re not physically present in the country. The foreign earned income exclusion (FEIE) allows U.S. taxpayers to exclude from their taxable income certain amounts they earn outside the United States. The FEIE was created in 1954 to relive American Citizens from the burden of double taxation when they move overseas.

WHAT IS THE FOREIGN EARNED INCOME EXCLUSION?

The Foreign Earned Income Exclusion is an IRS exclusion that American expats can use to reduce their taxable income (or in some cases completely eliminate) i.e. their U.S. tax owing. It is the most common and the most widely used tool to reduce US expat tax owing that the IRS offers.

You don’t automatically receive the benefit of FEIE by just living abroad — you must meet specific qualifications which we will discuss later and submit the Form 2555.

HOW MUCH FOREIGN EARNED INCOME CAN YOU EXCLUDE?

U.S. citizens and resident aliens who meet certain requirements to exclude up to $120,000 of foreign-earned income in 2023 (The FEIE is adjusted every year for inflation). If used correctly, the FEIE can help you save thousands of dollars on your US taxes.

The maximum exclusion for 2024 is $126,500. If you’re filing under the married filing jointly status and your spouse also meets the FEIE requirements, you can exclude up to $253,000 of your foreign income in 2024.

FILING FOR THE FOREIGN EARNED INCOME EXCLUSION: A GUIDE FOR MARRIED COUPLES FILING JOINTLY

Read More

The Substantial Presence Test: How To Calculate It With Examples

Navigating the complex landscape of U.S. tax regulations can be a daunting task, especially for individuals who split their time between the United States and other countries. One crucial concept that frequently comes into play is the Substantial Presence Test (SPT). This test is a critical determinant used by the Internal Revenue Service (IRS) to assess tax liability for individuals who are not U.S. citizens or green card holders but spend significant time in the U.S.

This article aims to provide a clear and detailed guide on the Substantial Presence Test, elucidating its criteria, implications, and how it applies to non-resident aliens. Our goal is to offer valuable insights that aid in achieving compliance with U.S. tax obligations, ensuring a thorough understanding of your tax residency status.

WHAT IS THE SUBSTANTIAL PRESENCE TEST?

The Substantial Presence Test is a criterion set by the United States Internal Revenue Service (IRS) to determine an individual’s tax residency status in the U.S. It applies to non-U.S. citizens and assesses whether they have spent a sufficient amount of time in the United States to be treated as a resident for tax purposes. This test is pivotal as it affects how and to what extent individuals are subject to U.S. income taxes.

The test calculates this by counting the total days of physical presence in the U.S. over a 3-year period. If the sum equals or exceeds 183 days, the individual is considered a U.S. resident for tax purposes for that year. This determination has significant implications for an individual’s tax liabilities, as it dictates whether they are subject to U.S. tax on their worldwide income.

WHAT ARE THE DAYS OF PRESENCE IN THE UNITED STATES?

Days of presence in the United States refer to the number of days an individual spends physically present in the country. This can include days spent for work, vacation, or any other purpose. For non-residents and foreigners, days of presence are often closely monitored to determine their tax liabilities and immigration status. For US citizens and residents, it can also impact their taxation and eligibility for certain benefits.

HOW TO CALCULATE THE SUBSTANTIAL PRESENCE TEST?

Read More

How Far Back Can The IRS Audit?

Navigating the labyrinthine world of U.S. taxes, including federal tax returns and individual tax returns, is challenging enough when you’re stateside. For U.S. expatriates, the complexity can multiply. One question that often looms large is, “How far back can the IRS audit?” Understanding the rules, statute of limitations, and exceptions surrounding IRS audits is crucial for maintaining compliance and peace of mind. Generally, the IRS has a three-year window to audit your tax returns, but as you’ll see, there are exceptions.

If you don’t file your tax returns, the statute of limitations never starts, allowing the IRS to audit the return at any time in the future. This is particularly important for U.S. expats who might assume they’re exempt from filing because they’re living abroad.

Related: Common Mistakes To Avoid When Claiming Foreign Earned Income Exclusion

What Is The Statue Of Limitations?

The term “statute of limitations” refers to the time frame within which the IRS is legally allowed to audit your tax returns for potential errors, omissions, or fraud. This period is generally three years from the date you filed your return or the due date of the return, whichever is later. After the statute of limitations expires, the IRS generally can’t question the information you’ve reported on your individual income tax return, or your filing history, or request additional documentation.

Taxpayers generally have three years from the date they filed their original tax return to claim a refund.

What Happens When You Don’t File Your Tax Returns?

Read More

There are a few deductions and exemptions available to a U.S. person who lives and works overseas. These will help you to lower your expat taxes and might even get you a refund.

If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. The most common deduction is the Foreign Earned Income Exclusion, which is calculated on Form 2555. If you qualify for this you may exclude up to $108,700 of your foreign earned income. To qualify, you will need to meet either the Physical Present Test or Bona Fide Resident Test for living outside of the U.S.

Foreign Housing Exclusion or Deduction is another option that can save you some money on your taxable income. You need to be either a salaried employee, a wage earner or a self-employed individual to qualify for this deduction. It’s in an addition to FEIE and increases the exempted income by the amount of your qualified housing expenses. Depending on the country of your residence, the allowable deductions for the foreign housing will vary and are subject to limitations.

Tax credits allow you to lower the tax due after your taxable income has been fully calculated. Your tax credit may include what you have already paid to your resident country. Foreign Tax Credit is useful for any expat who has paid taxes overseas. This option does not require a person to prove their residence in an overseas location. If a U.S. citizen works overseas or is involved in foreign investments, it is likely that they have paid taxes to a foreign government. If the tax rate of the foreign country is equal to, or greater than, the U.S. tax rate, the Foreign Tax Credit will successfully rid the expat of any U.S. tax obligation on that amount.

Use Form 1116 “Foreign Tax Credit” to figure out the amount of foreign tax paid and calculate the credit. To qualify for this credit, you will need to meet the following requirements:

Read More

Introduction To Citizenship Based Taxation

You will also learn alot from this YouTube Video: https://www.youtube.com/watch?v=DWYnIGgG0Ak

Part A: Introduction – About Citizenship-based Taxation
Part B: How the Internal Revenue Code is designed to mitigate the effects of double taxation in certain circumstances
Part C: Determining what is “foreign source” income
Part D: The problem of international waters …
Part E: The effect of sourcing to the US income earned in international waters by dual tax residents
Part F: Deducting “foreign taxes” paid – although income from international waters may not be foreign, it is still subject to the payment of “foreign taxes”
Part G: Can a US citizen living abroad be saved by a tax treaty? Maybe if he/she lives in Canada****
Part H: Conclusion and the need for “Pure Residence-Based Taxation”

Part A: Introduction – About Citizenship-based Taxation

Whether they live in Mexico, France, Canada, Brazil or even on a yacht, US citizens are taxable on their worldwide income. Worldwide income means income of all kinds, from all sources and wherever earned. US citizens are taxable an ALL income sources. It doesn’t matter whether the income has a source in Mexico, France, Canada, Brazil or even on a yacht. For example, a US citizen living in France who has ONLY French source income is required to treat that income as taxable in the United States. The fact that the income is also taxable in France is irrelevant!

The Internal Revenue Code is based on a presumption of double taxation. The presumption of “double taxation” is reinforced by the “saving clause” in US tax treaties where the treaty partner country agrees that the US retains the right to tax US citizens regardless of the tax treaty. The treaties themselves typically contain a small number of specified exceptions that mitigate against the effects of double taxation in certain narrow circumstances.

Relief from double taxation is available either domestically under the Internal Revenue Code or through provisions in international tax treaties (or possibly both). Each avenue of mitigation will be considered separately.

Read More