Improving offshore compliance has been a top priority of the Internal Revenue Service (IRS) for some time now. Because of this, people's ability to avoid detection is almost impossible, and most U.S citizens living abroad are now coming forward to meet their tax obligations. As there are those who are successfully meeting their duties, there are also many who fail to comply due to many reasons, such as lack of awareness, difficulties in proximity, or just because it is too much work. For those living abroad having trouble filing their tax returns, here are tips that will make your life easier as a taxpayer.
Use Foreign Tax Credit
Also known as Form 1116, the Foreign Tax Credit is essentially a dollar for dollar tax credit against any tax an individual pays to a foreign government. To be eligible for this tax credit, you have to earn income from a foreign employer, and you must have paid taxes to that foreign government. Another condition that qualifies you for this credit is you must be residing legally in another country. The beauty of this tax credit is that individuals can accrue the taxes paid to a foreign government and submit them to an accountant to receive a refund from the U.S government.
Utilize the Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion is for Americans living who earn income from foreign sources. Those who qualify for this exclusion can exclude from their U.S taxable income of up to $102,100. To be eligible for this, your income must be considered as Earned Income, which is money you earn from wages, fees, and commissions from foreign employers. The Foreign Earned Income Exclusion does not include unearned income which are interest, dividends, capital gains, and social security income among others. Another requirement to be eligible for this exclusion is to have a foreign taxed home, which are the primary locations of your work and your home.
Use the Foreign Housing Exclusion
The Foreign Housing Exclusion is a tax exclusion that the IRS has in place for expatriates to exclude expenses living abroad. These costs include book-keeping many things such as:
To qualify for the Foreign Housing Exclusion, expatriates must be physically living in a specific foreign country for a total of 330 days. With this exclusion, expatriates are allowed to exclude 30% of their foreign earned income, which is substantial given that a U.S citizen is making a substantial amount of salary.
File a U.S Tax Return Annually
For Americans living overseas, it is important to remember the date April 15 for it is Tax Day in the States. Filing taxes annually is an extremely important obligation for all U.S citizens as failing to do so is considered a criminal offense. For those who fail to file taxes abroad, they are looking at jail time especially those doing so with the criminal intent of hiding money. As many U.S citizens fail to file their taxes due to lack of awareness, it is highly recommended to seek the services of a tax preparer to account all taxes to get compliant as soon as possible.
Utilize the Foreign Bank Account Report (FBAR)
The Foreign Bank Account Report (FBAR) is a form that needs to be filed by American citizens and green card holders living abroad who have $10,000 or more in their financial accounts. All financial accounts include:
Filing for the FBAR is a very easy task as you can file online before the due date of April 15. For expats who have failed to comply due to lack of awareness, the IRS has an amnesty program referred to as the Streamlined Procedure. This procedure offers penalty-free compliance to expats who have not filed an FBAR report.
Always Report Your Assets Abroad
The Foreign Account Tax Compliance Act (FATCA) is a law passed by the U.S government that requires banks from other countries to identify which of their customers are U.S citizens. The role of the FATCA is to prevent Americans from parking their assets and wealth outside the U.S to avoid U.S taxation. For this reason is it crucial that all expatriates regularly report their any and all assets attained on foreign soil.
For more information on tax tips for American expatriates living abroad, a good recommendation is to find a tax preparer as these accountants know the scope of taxation ongoing in various countries.
