As you may know, if you have lived outside of the country most of the year, you can have up to $102,100 ($104,100 for 2018) of your income excluded from federal taxes under the Foreign Earned Income Exclusion (FEIE) (Form 2555). You can also claim a credit for taxes you paid to foreign governments, the Foreign Tax Credit (FTC) (Form 1116).
Generally speaking, if your foreign tax rate is greater than your US tax rate, the FTC would be more advantageous, or else the FEIE would be more advantageous. But don’t worry. I will be there to help you determine the most advantageous way to file your taxes.
In addition to these credits, it is important to establish your U.S. residence in a state which does not impose state income tax.
Many states have tax laws that mirror the federal exclusions, allowing either the FEIE or FTC for state tax purposes. Others have so called “safe harbor” laws – that is, you would be taxed as a non-resident even though you list your main residence in that state. They apply to people who have been out of the state for a specific number of days through the year, so it’s important to keep track of where you were.
If you’re looking to change the state of your residence for tax purposes, keep in mind that some states do not collect income tax. To prove that you’ve established a new residence, however, you would need to re-register to vote, get a driver’s license in the new state and update your mailing address with your banks and others. Getting a driver’s license in the new state typically requires a visit to that state. There are a few mailbox services that not only provide you a mailing address in the new state, but also guide you in the process.
Expats with children take note – the Additional Child Tax Credit is generally not compatible with the Foreign Earned Income Exclusion. To get the tax credits for children, one needs to have $2,500 of earned income in the US for the year, and you don’t’ claim the FEIE (it would still be available to those using the foreign tax credit). The Additional Child Tax credit is a nice thing to have since it can mean that you get a refund of up to $1,400 per child per year.
April 17th is widely known as the due date for taxes. If you happen to be living in the US on that date, then that is the date that applies to you as well. If you’re out of the country, you have until June 15, 2018 to file. You do not need to file for this extension; it is automatically afforded to anybody living overseas.
If you need more time, you can apply for an extension that will give you until October 15, 2018 to file. No response from the IRS is needed. As long as you’ve sent off Form 4868 by the June or April due date, your late tax return is covered.
Please note, however, that the extensions are an extension to file, not an extension to pay. Interest on taxes owed start accruing on April 17. If you suspect that you will owe tax, you can attach a payment to form 4868.
Whew. Are you still with me? It can be a lot to take in, but I promise to try to simplify things as much as possible for you in my next post as I cover the distinctions between the various forms you will need to know as you prepare to file.
Have a tax question? Contact Olivier Wagner.