Huddleston Tax CPAs offers a wide range of expatriate tax services, including foreign tax planning and compliance services.
If you are a U.S. citizen, resident alien living abroad, or if you have foreign income, it’s fairly common for you to have a complicated tax situation. There are steps you can take to mitigate this problem however. As your accountant, it’s our job to keep you informed, do the research, and take advantage of all of the deductions, credits and other tax saving opportunities available to you.
Remember, you need to be abroad for 330 full days to be considered an expat. If you have any doubts or think you’re right between 329-330, then all the more reason to get an accountant to help you find the right documentation. Making an error in travel time can cost thousands, so coordinate with us today.
Important Tax Issues Expats Should Know
Expatriation comes with its fair share of pros and cons. If you have a job in the US that can be done from anywhere in the world, then you have the freedom to travel. What’s more, typically your income will go a lot further in other parts of the world than your homeland. For instance, in Seattle (2019), the median income was approximately $50,000/year. While that might not get an apartment downtown, it could go a long way in some parts of Europe and Asia.
Of course, on the downside is a myriad of complicated issues since, if you’re self-employed, and make more than $400, you’ll need to file a tax return, although a positive upside (usually as a result of the distance and mail turnaround time) is expats automatically receive an extension; as a downside, this doesn’t mean you can put off payment on April 15th, you just have an additional two months to file.
Below is a list of some of the critical tax issues expats should know:
1. Foreign Earned Income Exclusion
U.S. citizens and residents who live and work outside the U.S. may be eligible for the foreign earned income exclusion which will reduce taxable income. By way of this exclusion, citizens and residents may be able to exclude all or a portion of their foreign wage or self-employment income from their federal income tax liability.
In order to qualify for this exclusion, a person needs to work and reside outside of the U.S. and also meet either the Bona Fide Resident or Physical Presence tests.
2. Foreign Tax Credit
If you pay taxes to a foreign government on foreign income and are faced with a federal income tax liability to the U.S. on said income, you may be eligible for a foreign tax credit. You may also benefit from an itemized deduction depending on the details of your situation.
If you take a deduction, your foreign income taxes will be used to reduce your U.S. taxable income. If you take the tax credit, your foreign income will reduce your U.S. tax liability. Taking the tax credit will place you in a superior position (in most cases).
3. Foreign Bank Account Reporting
If you have a financial interest in — or significant authority over — a foreign financial account, such as:
- a bank account
- brokerage account
- mutual fund
- money market account
or other type of account, and your interest exceeds certain thresholds (i.e. $10,000 at any time during the year), the Bank Secrecy Act may compel you to formally report your account annually to the IRS by filing a report of Foreign Bank and Financial Accounts (FBAR). To report the FBAR you will need to complete and send form TD F 90-22.1.
Form 8938 – Under FATCA, certain U.S. taxpayers holding financial assets — $50,000 on the final day of the tax year, or $75,000 at any time during the tax year — outside of the U.S. is required to report those financial assets to the IRS.
Higher threshold amounts apply to married couples filing jointly and for individuals who are living abroad. Generally, taxpayers report these assets using Form 8938 (downloadable above), Statement of Specified Foreign Financial Assets.
If you are neither a United States citizen or resident, but generate income in the United States, you may be required to file a U.S. income tax return.
Rental Income & Dividends/Interests from Assets in the United States
Individuals who are neither U.S. citizens or residents are liable for U.S. income tax only on the income which is generated by working with a U.S. trade or business entity. Rental income from U.S. real estate and recognized gains from the sale of U.S. real estate are subject to taxation by the United States. Also, as a general rule, dividends and interest payments from U.S. corporations are taxable by the U.S. government.
Expats Do Not Pay Taxes Twice
All this said, you don’t pay taxes in both countries. If you’re earning a foreign income, then make sure you inform us. There are innumerable deductions and exclusions to ensure you’re not being taxed twice on the same income. For this reason, many expats don’t owe taxes to the US. Additionally, if you live in a high-tax country, you may not owe any US taxes at all — again, all of this is dependent on your situation, where you live, where you’re earning income, how much you’re earning, and what your resident status is.
Located in the greater Seattle region, Huddleston Tax CPAs provides high-quality tax solutions both for U.S. expatriates overseas and for foreign nationals, including resident and non-resident aliens.
Call 425-483-6600 today and learn about our expatriate tax service.
Frequently Asked Questions
Do expatriates have to pay taxes?
If you are a US citizen, then yes, you pay taxes. Taxes are based upon your citizenship, not where you live and the US is one of the few places where that’s the case.
All that said, most US citizens do not end up owing any taxes state-side. This is because expats do not pay taxes twice in part due to the Foreign Tax Credit (FTC). This ensures you aren’t double taxed on income earned abroad.
What qualifies you as an expat?
If you’re a citizen in one country but living in another, you’re an expat. What makes this a smidge more complicated is that you can be a citizen in your country, and living in your country, but if you’re working in another country, you may also be considered an expat and need to pay expatriate taxes.
Do most expats return home?
Surprisingly, only 4% return home after a year. The bulk of expats spend approximately 5-10 years abroad. It’s a common question especially for people considering the move and for those who have been offered a unique opportunity.
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