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 $101,300 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:
- The tax must be imposed on you
- You must have paid or accrued the tax
- The tax must be legal and actual foreign tax liability
- The tax must be an income tax
If you chose not to 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.
Child Tax Credit and Additional Child Tax Credit are the real bonuses for people with children as their dependents. For each eligible child, you may receive credit of up to $1,000 to offset your tax owing. You will need to list this on Form 8812. It is disallowed if you claim the FEIE, but you can go along with FTC, which is the regular Child Tax Credit. Additional Child Tax Credit will help you to get any remaining credit refunded. It is entered as “payment” on your tax return. Your child must also meet the requirements if you are to be eligible to use these credits. They must be aged 16 or younger, a U.S. person and resident of another country. There are also income limitations for claiming Additional Child Tax Credit.
The U.S. and some other countries have a Totalization Agreement, which covers the amount of ‘credits’ that are accrued for old age or social security plans based on your work and salary. It is also beneficial for a self-employed U.S. person as it informs the IRS that the taxes are being paid to the home tax country. Make sure that your resident country has such an agreement before claiming its benefits.
A Tax Treaty is a document between the U.S. and the foreign country, which states what can and cannot be taxed in each respective country. This type of deduction prevents them from taxing foreign-sources dividend, interest or royalties income that has already been taxed in your resident country. If you receive these types of income and live in a foreign country that taxes them at a lower rate than the U.S., it’s beneficial for you to use this. You need to remember that every tax treaty is different and you can always contact us regarding your situation.
Generally speaking, you can take a deduction for these items:
• Personal exemptions
• Qualified retirement contributions
• Alimony payments
• Charitable contributions
• Medical expenses
• Mortgage interest
• Real estate taxes on your personal residence.
You can deduct charitable contributions made to a U.S. charitable organization that transfers funds to a foreign charitable organization. You also can deduct the real property taxes you pay which a foreign country imposes on you. Also, a U.S. expat can claim an exemption on their return for a nonresident alien spouse if: your spouse has no gross income for U.S. tax purposes and is not a dependent of another U.S. taxpayer.
Have a tax question on expatriate taxes? Contact Olivier Wagner.
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