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Expat Articles » The Intelligent Expat - 10 Tips and Tricks to Help You Deal with US Taxes

THE INTELLIGENT EXPAT
10 TIPS AND TRICKS TO HELP YOU DEAL WITH US TAXES

Don’t let the IRS bog you down while you’re living it up overseas! The last thing you want is to get stuck in a tangle of forms, penalties, and even threats of jail time. So, here are 10 of the common things that can trip you up as an expat, as well as the tips and tricks (and forms) to avoid them!

#1:  Filling a Foreign Income Tax Exclusion

The form you need: 2555

Tricks and traps: Guess what? Even if your foreign income is below the exclusion limit, you must still file a return! It is critical you do this on time if you want to claim that exclusion!
Expat Tax

#2:  Getting the Most Out of Your Foreign Tax Credit
The form you need: 1116

Tricks and traps: You can’t take out a foreign tax credit if your foreign income wasn’t taxed! But if not all of your income was excluded from foreign tax, you may be able to claim a credit on your U.S. Federal tax return for whatever taxes you did pay on that non-excluded income you made abroad. That’s all you need to know about the where.  Now, to qualify for the 2555-Forms, here’s what you need to know about the when.


# 3:  Foreign Housing Exclusion vs Foreign Tax Credit?
Tricks and traps: Unfortunately, you only get to pick one: 1) foreign housing exclusion or 2) foreign tax credit. Here’s the breakdown for what each means.
 

  1. Eligible housing cost = how much you paid on housing that year (up to 30% of foreign earned income exclusion) - base housing cost (16% of the foreign income exclusion) The excluded amount must be less than your overseas income for that tax year and less than the total cost of housing. Meanwhile, the deducted amount must also be less than the total cost of housing, as well as less than excluded foreign income minus your housing exclusion.
     
  2. The foreign tax credit can pretty much be claimed dollar for dollar for foreign taxes paid.

 

#4:  Opening Bank Accounts Abroad
The form you need: treasury form TD.90-22.1

Tricks and traps: If you get a bank account overseas, you have to file with the Treasury Department if you want to open an account with $10,000 or more. And don’t fall into the biggest trap of all-- Hiding money overseas is not a valid option to get out of paying taxes! This is fraud, which has no statue of limitations. Penalties and interest (not to mention jail time) can cost you much more than the original tax.


#5:  How Much Should you Really Rely on this IRS?
The form you need: 2555, I mean... 2555-EZ... right?

Tricks and traps: Don’t rely exclusively on the IRS for help. On one hand, you have the IRS putting out Publication 54 (download here) to help guide you through Form 2555 and its cousin 2555EZ. On the other hand... wait, what? Sure the IRS site might be a useful resource, but it can’t really give you all the details and instructions for your particular tax adventure. This goes double for the unusual situations you may find yourself in as an expat, so avoid leaning on the IRS as your only source of info.


#6:  Using Tax Professionals Not Experienced in Expat Tax Returns
The form you need: If he can't tell  you, run!

Tricks and traps: Still sticking with your local tax professional stateside? Don’t. While breaking up is hard to do, it’s critical that your tax professional understand the intricacies of the expatriate tax maze. Make sure your tax pro is familiar with the expatriate tax process before you both (although it will be mostly you) suffer.


#7:  Not Being Able To Find Your Tax Documents
The form you need: But I just had it! Where did it go???

Tricks and traps: What if the IRS decides to audit you? Do you know where your tax documents are? Can you access them? These can be much more difficult questions for an expat. One solutions is to back things up online. Expats especially should have worldwide access to secure, dependable online documents. For each year, catalogue key source documentation, completed returns, and any back and forth with the IRS. Keep documentation of your service abroad-- you never know when you just might need it.

What would be really neat is if you tax preparer had the ability to store your important tax documents for you, in a secure online storage area. Just saying....


#8:  Taking into Account State Taxes
The form you need: Depends on the state.

Tricks and traps: You may not owe any U.S. Federal tax, but be careful that you don’t still owe state tax. Some states don’t comply with the U.S. foreign income tax exclusion! Double check you don’t overlook any state taxes you might owe.


#9:  Missing out on Dependency Exemption
The form you need: Hint, it's not a social security number!

Tricks and traps: There are plenty of exemptions that expats don’t always take advantage of! For example, even if you have a dependent without a social security number, you can still take out a dependency exemption.


#10:  Going at it Alone
The form you need: Don't know? Ask a pro.

Tricks and traps: Ok, like most expats, you’re probably smart. Adventurous, even. But that doesn’t mean you should dive into tax returns on your own. Tax laws are constantly changing, and unless you’re constantly keeping track of the tax world, you may accidentally be using some outdated information, forms, whatever. Leave that stress to the tax professionals and let them help you make sure you’re on top of things.

But besides your tax return, there are plenty of financial road bumps you can run into along the way. When you’re navigating uncharted territory, don’t be afraid to ask for help. Remember, professionals, other expats, and even sites like this are all there to support you. By reaching out, you can create a richer, more meaningful expat experience for yourself.


About the author:

IJ Zemelman, EA is a Principal at Taxes for Expats LLP.
She may be reached at questions@taxesforexpats.com or +1-646-EXPAT-US
Website: www.TaxesForExpats.com