Death and Taxes
If you’re an American citizen living abroad, you may be under the misconception that you don’t have to pay taxes. That’s a myth, and holding onto that fairy-tale dream could put you in deep financial trouble, and even in the pen. Tax evasion is a serious crime in the US, so it’s important for expats to pay their due. The obligation file US taxes doesn’t end just when you take up residence in a new country. Taxes are as constant as your own shadow; they’ll follow you wherever you go, in this case in the form of tax for expats.
File Away
Different countries have different tax laws, and it’s important for people who are living in a foreign country to comply with the tax laws of the hosting country, as well as of their home country. For example, if you are a US resident, you must file a US Federal Tax Return each year to report on your worldwide income, especially if your income exceeds the filing threshold. That includes wages/salary from US and non-US sources, interest, dividends, and rental income. The filing threshold will vary depending on your filing status, so make sure that you understand which bracket you fall into, and which income you need to report when you file your tax for expats.
You’ll also want to make sure that you’re aware of any credits or refunds you may be eligible for. To be safe, and in case you are eligible for tax for expats refunds, you may want to file even if you’re not required to.
Don’t Pay Tax
The US offers several important deductions, exclusions, and credits to ensure that expats aren’t taxed double on the same income. These programs include the Foreign Tax Credit, Foreign Earned Income Exclusion, and Foreign Housing Exclusion. Many expats are eligible to claim the Foreign Tax Credit against income that has already been taxed by their host country. It’s one of the tax for expats programs that allows you to stay in full compliance with both countries’ taxation laws. Don’t pay twice!
Margin of Error
If you make a mistake one year when filing your income tax for expats, don’t fret. Mistakes happen, and if you discover that you’ve failed to report some income one year, or that you haven’t take advantage of all of the deductions permitted, you can file an amended return for that tax year. However, in order to keep the IRS from sniffing around, you’ll want to file an amendment before the IRS catches the mistake; the penalties tend to be less that way. Amended returns need to be filed before a certain date to seek a credit or refund, so make sure you act promptly and get that amended return in well before the due date.
Pay less
If you have dependent children, you may qualify for a Child Tax Credit, which can be very beneficial for expats—it may even result in a refund! There are certain restrictions, so like everything to do with tax for expats, you’ll want to do your research carefully to ensure you are eligible for the credit. In order to qualify for the credit as an American expat, all dependent children must have a US Social Security Number
Renouncing Citizenship May Not be a Smart Solution
Frustrated expats may consider renouncing their citizenship to avoid all the headaches and hassles of filing taxes in their home country, but this may not actually help them avoid paying taxes. In fact, expats may actually be taxed more if they choose to renounce their citizenship because they may be subject to an exit tax. American expats must also provide compliance on US tax for expats for the five years prior to the date of renunciation.
Consult a Professional
One of the best ways to ensure you are compliant with expat tax laws is to consult with a professional. Not only can a professional tax lawyer keep you out of hot water for tax non-compliance, but he or she can also advise you on the best strategies to minimize the amount of income you’re taxed on—and he or she can tell you what credits or refunds you may be eligible for. When it comes to tax for expats, there are numerous forms and deadlines, and missing even one could make a sizeable monetary difference and affect your financial future. Be smart with your money and with your taxes: consult with a professional to make sure that you know all the options available to you, as well as the obligations.