Starting To Think About Filing Your Expatriate Tax Return? Wait! Read This First: How to Save Money on Your US Expat Taxes Living and working in a foreign country, whether it is temporary or permanent, can be a fulfilling and rewarding experience. Moving to another country, although exciting, does come with some challenges and requires that you learn a bit of new information as it relates to your US taxes. In order to reap the full benefits of living abroad you need to do some research regarding your expatriate tax return obligation before you need to file. No one likes filing their taxes, and certainly no one likes to spend money unnecessarily, so saving money is crucial. This article will provide you with four great ways to save on your US expat taxes.
Take advantage of the Foreign Tax Credit & Foreign Earned Income Exclusion While you're living abroad and filing your US taxes, it is important to make sure that you take full advantage of Form 1116 and Forms 2555, otherwise known as the Foreign Tax Credit Form and the Foreign Earned Income Exclusion, respectively. The Foreign Tax Credit gives you a credit on your US expat taxes for the amount of money you have paid in tax to a foreign government. The Foreign Earned Income Exclusion helps you by excluding a big chunk of your foreign earned income from your US taxes. This is important because even as a US expat, all of the income that you make outside the United States is subject to identical tax rates as someone who is working and living inside of the US. That is where Form 2555 comes in. By completing this form, you can exclude up to $91,500 USD of income earned abroad from your US expat tax return. While including potential deductions of housing and living expenses, it is possible to counterbalance most if not all of your tax liability in a given calendar year.
The Foreign Tax Credit (or Form 1116) is different than Form 2555 but they work together to help you save money on your expat tax return. It is important to note that many people take a wrong turn when using these two forms by assuming their taxes will be offset by the numbers they have worked out, and they decide not to bother filing their expat taxes at all. Clearly this isn't going to do you any good! If you earn money abroad you will need to file in order to receive these tax breaks and avoid being hit with penalties.
Adjust your Foreign Housing Credit for the country you live in A second tip for filing your US expatriate tax return is to make sure your Foreign Housing Credit is adjusted for the country you live in. The rates vary from country to country which can drastically affect the end result, so it is extremely important to make sure that this is adjusted. As a US citizen living and working abroad, you may be eligible to deduct some of your housing costs from your income in order to save some money on your taxes. In order to qualify for this deduction, you need to meet the "bona fide residence test" or the "physical presence test." This test ensures that you are indeed living and working abroad. The IRS allows this deduction because they recognize that you may need to spend more money on housing outside of the US. Generally, the deduction is for a maximum of $27,450 or 30% of your Foreign Earned Income Exclusion and you deduct this amount from your gross income for housing costs. As mentioned, this rate is adjustable depending on where you are living. For example, compared to living in the US, places such as London, Paris, Singapore, Hong Kong, Dubai and Perth all qualify for a much higher deduction rate than the standard rate due to the higher costs of living. By being aware of the changing rates associated with your country of residence, you could end up saving a lot of money!
China is planning to consider raising the taxes for those who make over $500 per month, whereas right now it is at $300 per month, which is almost twice the minimum allowable wage. China thus, plans to tax the rich or wealthy and re-distribute wealth. Just as our nation in the USA taxes wealthy folks at a higher rate than those who don't make a lot of money, but actually soak up more government services.
As I have explained this to people in the past, folks just shake their heads and believe that people who are rich should pay higher percentage of their income to taxes. This is really unfortunate thinking, because we are penalizing those who produce. And therefore we will get fewer producers, and less productivity, therefore less abundance in our entire society and civilization, and thus, there will be less money left over from those unfortunate few who cannot produce.
In other words, our taxation strategies and theories are causing the very opposite of their intent. Indeed I hope you will please consider all this and think on it. As you probably guessed I am not a socialist thinker,
As you can see, there are a lot of things to consider before moving abroad to live and work as an expat. Expat tax preparation is incredibly important and you will make it much easier for yourself and your family if you do your due diligence before you leave. Following these recommendations will help to ensure that you file your taxes correctly and that you save as much money as possible.
Take advantage of the Foreign Tax Credit & Foreign Earned Income Exclusion While you're living abroad and filing your US taxes, it is important to make sure that you take full advantage of Form 1116 and Forms 2555, otherwise known as the Foreign Tax Credit Form and the Foreign Earned Income Exclusion, respectively. The Foreign Tax Credit gives you a credit on your US expat taxes for the amount of money you have paid in tax to a foreign government. The Foreign Earned Income Exclusion helps you by excluding a big chunk of your foreign earned income from your US taxes. This is important because even as a US expat, all of the income that you make outside the United States is subject to identical tax rates as someone who is working and living inside of the US. That is where Form 2555 comes in. By completing this form, you can exclude up to $91,500 USD of income earned abroad from your US expat tax return. While including potential deductions of housing and living expenses, it is possible to counterbalance most if not all of your tax liability in a given calendar year.
The Foreign Tax Credit (or Form 1116) is different than Form 2555 but they work together to help you save money on your expat tax return. It is important to note that many people take a wrong turn when using these two forms by assuming their taxes will be offset by the numbers they have worked out, and they decide not to bother filing their expat taxes at all. Clearly this isn't going to do you any good! If you earn money abroad you will need to file in order to receive these tax breaks and avoid being hit with penalties.
Adjust your Foreign Housing Credit for the country you live in A second tip for filing your US expatriate tax return is to make sure your Foreign Housing Credit is adjusted for the country you live in. The rates vary from country to country which can drastically affect the end result, so it is extremely important to make sure that this is adjusted. As a US citizen living and working abroad, you may be eligible to deduct some of your housing costs from your income in order to save some money on your taxes. In order to qualify for this deduction, you need to meet the "bona fide residence test" or the "physical presence test." This test ensures that you are indeed living and working abroad. The IRS allows this deduction because they recognize that you may need to spend more money on housing outside of the US. Generally, the deduction is for a maximum of $27,450 or 30% of your Foreign Earned Income Exclusion and you deduct this amount from your gross income for housing costs. As mentioned, this rate is adjustable depending on where you are living. For example, compared to living in the US, places such as London, Paris, Singapore, Hong Kong, Dubai and Perth all qualify for a much higher deduction rate than the standard rate due to the higher costs of living. By being aware of the changing rates associated with your country of residence, you could end up saving a lot of money!
China is planning to consider raising the taxes for those who make over $500 per month, whereas right now it is at $300 per month, which is almost twice the minimum allowable wage. China thus, plans to tax the rich or wealthy and re-distribute wealth. Just as our nation in the USA taxes wealthy folks at a higher rate than those who don't make a lot of money, but actually soak up more government services.
As I have explained this to people in the past, folks just shake their heads and believe that people who are rich should pay higher percentage of their income to taxes. This is really unfortunate thinking, because we are penalizing those who produce. And therefore we will get fewer producers, and less productivity, therefore less abundance in our entire society and civilization, and thus, there will be less money left over from those unfortunate few who cannot produce.
In other words, our taxation strategies and theories are causing the very opposite of their intent. Indeed I hope you will please consider all this and think on it. As you probably guessed I am not a socialist thinker,
As you can see, there are a lot of things to consider before moving abroad to live and work as an expat. Expat tax preparation is incredibly important and you will make it much easier for yourself and your family if you do your due diligence before you leave. Following these recommendations will help to ensure that you file your taxes correctly and that you save as much money as possible.
About the Author:
Harris Smith is a writer on personal finance education. Her article tackles the pros and cons of home equity line of credit. Largest provider of Debt Consolidation Solutions.