Cross Border Tax

Understanding the tax code alone is already an intimidating task, add being a US Expat in the mix, and it becomes even more complex and confusing. To avoid committing mistakes or missing deadlines and forms to file, follow our series of blogs where we discuss important things expats should keep in mind!

Missed part 1? Here’s the link to it: Things You Should Know About US Expat Taxes Part 1

1. Make Sure You Pass the Bona Fide Residency Test

You must pass the bona fide residence test to qualify for the foreign earned income exclusion. The bona fide residence test applies to U.S. citizens and to any U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.

Whether you are a bona fide resident of a foreign country is determined by the facts of your situation and may include such factors as your intention or purpose for being in the foreign country, your activities in the foreign country, and whether you paid taxes to the foreign country, among other things. The IRS decides whether you qualify as a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555, Foreign Earned Income. The IRS cannot make this determination until you file Form 2555.

Source: https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-residence-test

 

2. Monitor Your Travel Time Carefully

If you plan to qualify for Foreign Earned Income Exclusion via Physical Presence Test, make sure that you have counted your travel days correctly. To meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period including some part of the year at issue. You can count days you spent abroad for any reason, so long as your tax home is in a foreign country.

There are also other conditions to note as you count travel time. Make sure you know and consider this in counting your travel time.

Keep in mind that if you have reported wrong travel days calculations, you could face huge penalties on your tax return.

Source: https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-presence-test

 

3. File for an Extension

If you are worried that you won’t qualify for the Foreign Earned Income Exclusion and will miss out on a lot of tax benefits, but know that you will qualify in the near future, you can apply for an extension to file using Form 2350.

This form is used to ask for an extension of time to file your tax return only if you expect to file Form 2555 – Foreign Earned Income and you need the time to meet either the bona fide residence test or the physical presence test to qualify for the foreign earned income exclusion. You should file this form on or before the due date of your Form 1040 or 1040SR.

Source: https://www.irs.gov/pub/irs-pdf/f2350.pdf

 

4. Educate Yourself About Tax Treaties

Determine if the foreign country you are staying in has a tax treaty with the US and educate yourself how it can affect your US taxes. The US has tax treaties with a number of foreign countries.

Check this IRS page that provides links to tax treaties between the United States and particular countries: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z

If you are an expat and need help with your taxes, our Enrolled Agent can help you! Contact us today at admin@fas-accountingsolutions.com or at 713-855-8035.

Understanding the tax code alone is already an intimidating task, add being a US Expat in the mix, and it becomes even more complex and confusing. To avoid committing mistakes or missing deadlines and forms to file, follow our series of blogs where we discuss important things ex-pats should keep in mind!

 

1. Expats Must File US Taxes If You Have Income

If you are a U.S. citizen or resident alien living outside the United States, you generally are required to file income tax in the same way as those residing in the United States.

Source: https://www.irs.gov/pub/irs-pdf/p54.pdf

 

2. Amend Tax Returns from Previous Years If You Noticed a Mistake

Preparing and filing US expat tax return is undeniably complicated and it’s not uncommon for taxes to be filed incorrectly or incomplete. If you find that you have failed to report some income on your return or missed filing some forms, you should file an amended return for that tax year.

Form 1040X, Amended US Individual Income Tax Return, is the form you need to file. Make sure to clearly indicate the year for which you are filing an amended return at the top of Form 1040X and you should file different Form 1040X if you are filing amended returns for multiple years.

In the form, you will need to include the information on your original return, the difference between the original and the amended amount, and the actual amended amount. There is also a section on the form for you to state the reason why you are needing to file an amended tax return.

Source: https://www.irs.gov/pub/irs-pdf/f1040x.pdf

 

3. Check If You Qualify for Foreign Tax Credit

If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income.

Generally, the following four tests must be met for any foreign tax to qualify for the credit:

• The tax must be imposed on you
• You must have paid or accrued the tax
• The tax must be the legal and actual foreign tax liability
• The tax must be an income tax (or a tax in lieu of an income tax)

On the other hand, there are the Foreign Taxes for which you CANNOT take a credit. Make sure you familiarize yourself with those.

Source: https://www.irs.gov/individuals/international-taxpayers/what-foreign-taxes-qualify-for-the-foreign-tax-credit

 

4. The Foreign Earned Income Exclusion

You may qualify to treat up to $105,900 of your income as NOT taxable by the United States. This is a benefit is called Foreign Earned Income Tax Exclusion. To qualify for the exclusion, you must have foreign earned income and must be one for the following:

• A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
• A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
• A U.S. citizen or a resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

If you qualify for the exclusion, be sure to elect it by filing Form 2555

Source: https://www.irs.gov/publications/p54#en_US_2019_publink100047309

If you are an expat and need help with your taxes, our Enrolled Agent can help you! Contact us today at admin@fas-accountingsolutions.com or at 713-855-8035.

I’m a US Citizen / Green Card Holder, do I still have to pay taxes even when I’m living abroad?

Yes.

The US have citizenship-based taxation system which means that if you are an American citizen, no matter where you are, you must file US tax returns and pay taxes. Even If you are living abroad, the same tax rules apply to you regarding income taxation as the people living in the US.

 

I’m a US Citizen / Green Card Holder and work overseas, how much taxes do I pay?

Foreign income is taxed at the same marginal rate as any income earned inside the country.

The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.

Also, you may be required to file a state tax return depending on where you lived prior to moving abroad. There is no quick way to answer this question, so make sure you work with a tax preparer to properly calculate how much you should pay for your US taxes.

 

Will I be double-taxed since I will still be paying my US taxes even when I’m already being taxed by the country I am currently living in?

The US tax code contains a provision called the foreign earned income exclusion (FEIE) where expats may be permitted to exclude $108,700 (for 2021) of income earned abroad from their US tax obligation.

There are rules to get this FEIE: you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following; (1) A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, (2) A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or (3) A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. You can use the IRS’s Interactive Tax Assistant tool to help determine whether income earned in a foreign country is eligible to be excluded from income reported on your U.S. federal income tax return.

Another provision is the Foreign Tax Credit. But keep in mind that you can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, the following four tests must be met for any foreign tax to qualify for the credit: (1) the tax must be imposed on you, (2) you must have paid or accrued the tax, (3) the tax must be the legal and actual foreign tax liability, and (4) the tax must be an income tax.

 

When and where should I file my US taxes while I’m living overseas?

If you are a U.S. citizen or resident alien residing overseas, you are allowed an automatic 2-month extension to file your return without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15.  Note that you must pay any tax due by April 15 or interest will be charged starting from April 15.

If you are a U.S. citizen or resident alien (including a green card holder) and you live in a foreign country, mail your U.S. tax return to:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
USA

 

Are you a US citizen living in Canada and need assistance with your taxes? Let us help you! Contact FAS Bookkeeping and Tax Services today at admin@fas-accountingsolutions.com or 713-855-8035 so our Enrolled Agent can help you.