Americans Moving Overseas

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Americans Moving Overseas - Tips To Save On Taxes

For many Americans overseas, thinking about taxes may be low on the list, but there are some opportunities to save on taxes and maximize your income.

1 - Keep Filing U.S. Tax Returns

As a U.S. expat living overseas, you are still required to file U.S. tax returns each year. You will always file the federal return reporting worldwide income.
Depending on the last state you lived in the U.S. and your ties to that state, you may also need to file a state tax return - California is one state that will keep a close hold on you.

2 - Use the Foreign Tax Credit

While you earn income overseas (employed to self-employed), you will still need to report that back to the U.S. each year, but you can claim any tax paid in the foreign country against the U.S. tax so there is no double taxation.
You attach form 1666 to the federal tax return (form 1040) and show the foreign income and foreign tax paid.
You can also use the foreign tax credit claim for investment (interest, dividends and capital gains) and property income earned outside the U.S.

3 - Foreign Earned Income Exclusion

If you are living outside the U.S. for the whole year, you can claim to exclude just over $100k of foreign employed and self-employed income from U.S. tax. You do still need to file the U.S. return and declare the income first - the foreign exclusion does not mean you don't need to file or declare that income.
The foreign earned income is just for employed and self-employed income, you can't use that for investment income and rental property income.
To claim the foreign exclusion, you add form 2555 to your federal tax return showing the total earned income and the amount you are excluding.
If you still have foreign income which is triggering U.S. tax, you can also claim the separate foreign housing exclusion, this will provide additional tax relief on your earned income.

4 - Foreign Bank Account Reporting

As well as filing the U.S. expat tax return each year, you will also need to report back to the U.S. Treasury any bank accounts, savings accounts, investments and pensions you hold outside of the U.S. This is a yearly report, the FBAR or FinCEN 114, filed online by April 15 with the U.S. Treasury.

5 - Catching Up With US Returns

For Americans who are living overseas and have not filed for a while or did not realize they needed to file returns after they left the U.S. there is an amnesty in place by the IRS.
The Streamlined Filing Procedure allows all U.S. citizens to catch up with their taxes with no penalties.
Also known as the Streamlined Foreign Offshore Procedure, you will need to file the last 3 tax returns - all returns before this are waived.
You also need to complete 6 years of foreign bank account reporting (FBAR) - again there are no penalties as part of the amnesty.
The Streamlined Filing Procedure is highly recommended to get U.S. citizens compliant - even if you were born outside of the U.S. and have U.S. citizenship through parents and have never filed - once you realize you do need to file U.S. taxes then this should be your route to catch up.

6 - Reporting Investment Funds Overseas

If you decide to invest in groups of shares, funds, outside of the U.S. you will need to report each fund back to the U.S. every year through your federal tax return.
You will complete form 8621, which reports this fund (PFIC reporting) to the U.S. and make an election for how the fund is to be taxed in the U.S. - there are a few different methods.

7 - Double Taxation

Many Americans abroad are concerned with double taxation as they are reporting in the foreign country and also back to the U.S. each year.
Through the U.S. expat tax return, by claiming foreign tax credits and the foreign earned income exclusion that should stop double taxation.
You have a third option, you can use the tax treaty if the U.S. has one with the foreign country. Within that U.S. tax treaty there will be clauses for different types of income and you can quote the treaty to stop the double taxation.
If you live in a country where the tax rate is higher than the U.S. - there should be no further U.S. tax to pay.
If you are in a country where there is no tax or the tax rate is lower than the U.S. - initially you will want to focus on the foreign earned income exclusion and then the U.S. tax treaty with that country.

8 - Additional Child Tax Credit

While you are living overseas, you will still be able to claim a tax credit for your children if they are U.S. citizens with social security numbers.
When you complete your U.S. tax return you can claim a deduction of $2,000 against U.S. taxes due.
In most cases, if all the income is from the foreign country, you won't have any U.S. tax to pay - so you can claim the tax additional child tax credit as a repayment which is $1,400 per child, per year.

9 - Receiving Pensions and Social Security Overseas

Pensions can be slightly difficult for tax - they will be reportable in your home country and also the United States.
American citizens may be able to use the U.S. tax treaty if there is one in place with that country, claiming the pensions clause so that the pensions are taxable in the country you are living and working.
As part of your tax filing, if you do use the treaty, you will need to attach form 8833 to explain which clause you've used and how that gives you tax relief.

10 - Additional Help From Tax Professionals

Americans living overseas do have additional tax reporting to the U.S. to stop double taxation and also reporting their foreign financial accounts each year.
If you do need assistance with your tax preparation, Bambridge Accountants specialize in helping U.S. expats with their taxes and catching up with tax returns if you didn't realize you needed to file.
If you do have any questions on your expat income taxes and filing the various forms with the return to the United States you can contact them to discuss their services.