The tax season is upon us and as expats begin the arduous task of gathering documents for their US tax preparation, it seems like a good time to provide an overview of the 2013 tax changes that may impact expats. The most important impact may be saving money, so let’s take a closer look!
1) The Foreign Earned Income Exclusion (FEIE)
We love that the Foreign Earned Income Exclusion adjusts for inflation each year! Last year the FEIE was $95,100 and this year it jumps to $97,600. This means you deduct the first $97,600 you earn—you could eliminate your entire US tax liability with this credit alone. However, it’s important to remember that you must ‘qualify’ as an expat to be eligible for this exclusion. You qualify via one of two residency tests: the Physical Presence test (PPT) or the Bona Fide Residence test (BFR). Many expats qualify by the PPT, which requires you to earn foreign income and be outside the US for 330 of any 365 day period. Note that this is not a calendar year, but a rolling 365-day period. To qualify using the BFR, you must be overseas for at least one year and have no intentions of returning to the US.
2) The Foreign Housing Exclusion
This is another fabulous way to reduce your US tax liability! With this exclusion, you can deduct a certain amount of your housing expenses—the IRS acknowledges that living abroad can result in a higher cost of living so there are adjustments to balance that out. For 2013 the base deduction is $15,616 (it is tied to the FEIE each year). Your exclusion amount is prorated based on the number of days you are abroad. Now, if you happen to live in one of the many cities that the IRS deems to have a ‘higher cost of living,’ your exclusion will be even higher. Here is a sample of the increased allowances for more expensive cities:
• Sydney, Australia – $32,782
• Montreal, Canada – $60,600
• Hong Kong, China – $114,300
• Tokyo, Japan – $117,100
For a complete list of cities with higher allowances, click here.
If you haven’t heard about FATCA yet, this year you certainly will. FATCA was created to uncover tax cheats hiding US money in offshore accounts. Currently individuals with offshore assets are required to file FATCA Form 8938 if their assets exceed specific thresholds. Starting in July 2014, FATCA will require foreign financial institutions to report on the accounts of their American clients. What does this mean? Basically, there is no place for one to hide. If you have offshore assets exceeding the thresholds, you need to report them or your foreign financial institution will! The filing thresholds for expats are as follows:
• Single Filing: $200,000 on the last day of the year or $300,000 at any point during the year
• Married Filing Jointly: $400,000 on the last day of the year or $600,000 at any point during the year
Form 8938 is filed along with your US tax return. If you request an extension, you receive an extension on Form 8938 as well.
4) FBAR (Foreign Bank Account Report)
There is a new process for filing your FBAR. The old way of paper filing Form TD 90-22.1 is history. You now need to file FBAR electronically to the US Treasury Department via FinCEN Form 114. The deadline is still the same—June 30th and there are no extensions.
You must file FBAR if you have foreign bank accounts totaling $10,000 or more. Note that this is an aggregate amount over all your accounts and even if you had $10,000 in the accounts on only one day, you will need to file FBAR. Penalties for failing to file can be steep, so if you are required to file, don’t miss the deadline!
In 2014, Obamacare (otherwise known as the Affordable Care Act) came into effect. While this doesn’t impact your 2013 taxes, it’s still quite noteworthy! Obamacare requires that every American hold the minimum essential healthcare coverage—those who don’t will pay a penalty on their taxes. If you qualify as an expat (via the PPT or BFR) you are exempt from Obamacare. If you do not qualify (i.e. you are on a shorter-term assignment or haven’t been abroad long enough yet) or you are ineligible for a qualifying US expatriate healthcare policy, you may be subject to the tax. The penalty for 2014 is the greater of $95 per adult and $47.50 per child OR 1% of your family income (defined as income over and above the filing threshold). If you return to the US after being abroad, you will be required to enroll in a qualified policy in order to avoid the tax.
Staying abreast of the latest tax updates is critical for expats, as these updates can certainly save you money and help avoid costly oversights. If you have questions about qualifying as an expat or how to calculate your allowable deductions, we suggest you contact an experienced expat tax accountant.