Guide for Expats Working Abroad About Tax Considerations and Common Missteps

Whether you’ve just moved to live and work in another country, or if you’ve been a US expat for some time now – one of the most challenging tasks is, undoubtedly, filing taxes. The entire process can be exceedingly confusing for a layperson, and missteps and errors are common. If this is you, know that close to 9 million of your compatriots worldwide are likely in similar situations. Your best bet is to work with an expert tax consultant who can guide you with your taxes in Canada or any other country where you’re currently living. You’ll also learn which exclusions to take advantage of what types of income you absolutely must declare.

Be Clear on Your Citizenship Status

While many American citizens have moved to offshore locations for better career prospects or a more economical retirement, others are students and tourists traveling abroad for a year or less. Then there are US expats who had acquired US citizenship because their non-American parents were visiting the country when they were born.

All legal US citizens or Green Card holders must file taxes with the IRS each year. It is also advisable to be clear about your resident/non-resident status since tax rates and exclusions are calculated accordingly.

You’ll File Tax Returns Even if You Don’t Owe Taxes

Many US expats assume that they don’t need to file returns because their income is below the taxable limit. Regardless of total income and whether you’re paying taxes in another foreign country, filing taxes back in the US is mandatory. Even if you receive payment in other currencies, you’ll convert the figures into US dollars using the directions outlined by official Foreign Currency and Currency Exchange Rates.

Your household status will also influence the returns. Like, for instance, as a retiree, or as a married couple filing joint returns, or you could be unmarried, divorced and paying alimony, or supporting kids. Children are liable to pay taxes if they earn an income that is above the taxable thresholds. Parents or guardians are responsible for filing their returns on schedule each year.

Not Paying Your Taxation Dues Can Incur Penalties

Unless US expats have a reasonable cause that explains why they did not file IRS returns on schedule, they stand to incur severe penalties and fines. Not only do the current Streamlined Foreign Offshore procedures require that you submit a certification statement, but you’ll also pay interest for the time frame when the taxes remain unpaid. Fines can range from 5% to 25% of the total tax due for each month.

The IRS also makes the distinction between “willful” and “non-willful” tax payment negligence. If you can prove that non-payment was inadvertent, in error, or because of misunderstanding the law, the IRS might lower the applicable penalties.

You Must Declare Your Worldwide Income, Bank Accounts, and Assets

The IRS requires Americans to file tax returns declaring their worldwide income from all sources. For instance, you’ll include salary and wages along with interest earned on securities and investments. Also, add information about social security benefits received, retirement income, and earnings from partnerships or trusts.

If you own a business and intend to liquidate it, find out everything you can about how to sell the company and the applicable capital gains taxes. Further, according to Foreign Bank Account Reports rules, you must complete and submit a Form 8938 declaring any balances in foreign bank accounts along with the account number, name of the financial institution, and names of any joint owners. The FATCA refers to Foreign Account Tax Compliance Act that requires US expats to declare any other assets that you may own in the offshore country over and above specific thresholds.

The IRS has Exclusions Expats Can Use

The IRS offers US expats several exclusions on the taxes they must pay. Taking advantage of these rules can significantly lower the total tax you owe to the IRS. Your tax consultant can provide detailed information about how the exclusions work. For instance:

Foreign Earned Income Exclusion (FEIE)

The IRS sets a specific income limit each year adjusted to account for inflation. You’ll pay taxes only on the amount over and above this income limit. For the fiscal year 2024, this cap is set at $107,600 per person. Married couples who meet the bona fide residency criteria can avail of an income slab of $215,200 on the joint returns they file.

As for how the FEIE works – say, you earn $200,000 each year. After deducting the FEIE on your income, you’re liable to pay taxes on the balance amount. $200,000 – $107,600 = $92,400 taxable dollars.

Foreign Tax Credit

The US government has a bilateral tax treaty with most foreign countries to protect US expats from paying double taxation on the income they earn. Accordingly, the Foreign Tax Credit exclusion has been instituted. You’ll deduct any taxes paid to the resident country from the applicable tax dues to the IRS. On the flip side, if you’re paying higher taxes in the host country and the tax dues are lower for US expats, you can add up the credit and “carry it forward.” The IRS permits you to use the credit in the years when your tax obligation is higher.

Foreign Housing Exclusion

US expats can use the Foreign Housing Exclusion facilities to offset their living expenses abroad. For instance, you’re allowed to deduct some of your household costs from payable taxes to the IRS. This exclusion is provided to expats incurring more than 16% of their FEIE in living costs for that specific year.

You must fulfill all the essential criteria for a bona fide resident, like spending at least 330 days in 12 consecutive months in a foreign location. Keep records of your travels as you go so that when tax season arrives you’re not scrambling to remember the dates of every international trip from the last year.

Taxation Regulations for Self-Employed Expats

If you’re working as a freelancer or own a sole proprietorship in the host country, you’ll pay taxes worth 12.4% on earnings of up to $137,700.

US self-employed expats are also permitted to take advantage of additional exclusions like the FEIE and Foreign Housing Exclusion. However, you’ll pay an additional 2.9% tax on your income by way of medical insurance.

Tax Obligations for Expat Business Owners

US expat business owners are liable to pay taxes according to the structure of their company. For instance, a Limited Liability Company (LLC) is considered disregarded by the IRS, and any applicable income and taxes are reported on the owner’s returns.

At the time of organizing the company, you’ll complete and submit Form 8832. For every subsequent year, you must submit Form 8854 for the company to maintain its disregarded status. On the other hand, if you own or acquire more than a 10% stake in a corporation, the IRS requires you to file Form 5471.

Remember to keep good records throughout the year. Even if they’re never needed for your taxes, they’ll make it easier for you to track your finances and prove accuracy in case there’s ever any question. Large monetary transactions that involve multiple currencies are one potentially sticky area. Make sure that you’re getting proper digital notarization when it’s required by the U.S.

Taxation Requirements for Expat Retirees

Since US taxation laws include worldwide incomes from all sources, you’ll also declare Social Security checks that are taxed as passive income. When filing returns, US expat retirees must also add details about all retirement distributions aside from ROTH and IRA receipts. Though, if you’re also paying taxes in the host country, benefits on the Foreign Tax Credit program are applicable.

Understanding Expat Deadline Extensions for Filing Taxes

While you do have the option of filing returns digitally, the IRS understands that you may need extra time to get the paperwork in order. The typical deadline for onshore US residents is April 15 for the preceding fiscal year. However, US expats are given an extension of another 2 months to comply with their obligations. Accordingly, you must complete and file the return by June 15th. Though, interest accrues on the tax amount for two months. US expats serving the armed forces or having dual citizenship must also follow this extension.

Keep Up with Your Obligations with the Advice of Expert Tax Consultants

US taxation laws can be complicated with varying exclusions and obligations for expats with different non-resident statuses. Make sure to declare the total earned income from all sources in your annual returns. You’ll also want to include any income that your kids and partner are earning.

Retirees and business owners may also want to work with a US-based CPA who has a keen understanding of your situation. Find someone who understands not only IRS rules and regulations, but the tax laws and procedures of your new home, too. Most importantly, check for the taxation laws in your host country that apply to expats and learn how to file returns in both locations.

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