Top 5 Expat Tax Tips for Americans Living Abroad

Ah, the expat lifestyle. New places to explore, new people to meet and new tax laws to learn (that last one isn't nearly as exciting as the first two). But while no one likes to talk about taxes, the US tax system is complex and moving out of the States doesn't relieve you of your obligations - and expat taxes are even more confusing than US resident taxes! So to help you out, we have outlined the top 5 things you need to know about taxes when you live overseas!

1) Don't forget to file your US tax return each year.

One of the biggest myths among expats is that you will only need to worry about taxes in your host country. Not true. The US taxes its taxpayers on their worldwide income—so no matter where you live, you need to file a return. So long as you meet the minimum filing thresholds set by the IRS (which are quite low, yet vary by your filing status) or earn $400 or more as a self-employed individual, you will need to file. This means that unless you move to a no-tax country (such as the UAE) you will file two separate returns. You are required to report any income earned in your host country as well as any income earned in the US. Some countries require you to report your worldwide income, but that often depends on your residency status (which obviously varies by country). So if you will continue to earn income from the US, remember to check your host country's tax laws to determine if that income needs to be reported on their return, as well.

2) Determine your residency status- it can save you money!

While it may seem inevitable that you will pay tax in both countries, that very well may not be the case. The US has implemented a number of safeguards against this. Once you qualify as an official expat, there are several options you can use to offset your income. To determine if you qualify as an expat, you must pass one of two residency tests: the Physical Presence test or the Bona Fide Residence test.

To qualify via the Physical Presence test, you need to earn foreign income and be outside the US for at least 330 days of any 365 day period (notice this is not a calendar year). For the Bona Fide Residence test, you need to have been living abroad for at least a year and have no intentions of moving back to the US. So, most of you would qualify via the Physical Presence test. Just be sure to carefully calculate your days in the US if you come back for vacation - you don't want to lose out on the credits and deductions by relinquishing 'expat status'!

3) Take advantage of the deductions and credits you are eligible for!

Once you know you qualify as an expat, there are several ways to ensure you don't get taxed twice on the same income.

The Foreign Earned Income Exclusion (FEIE) - The FEIE allows you to exclude up to $97,600 of your income from your US taxes. So if you earn less than this amount, you won't owe any US taxes (but you still need to file!) If you earn over $97,600, the remaining amount may be taxable.

The Foreign Tax Credit - This is a dollar for dollar credit on the taxes you pay to your host country. Let's say you earn $107,600. You exclude the first $97,600 with FEIE, leaving $10,000 of potentially taxable income. You can deduct the taxes you paid your host country, but only on this $10,000. You aren't allowed to take the Foreign Tax Credit on income that was already reduced by FEIE, so only the remaining $10,000 would be eligible for further tax deduction. The US makes sure there is no 'double-benefit' whereby you reduce your income with FEIE and then take the Foreign Tax Credit on that same reduced income!

The Foreign Housing Exclusion - This exclusion helps offset some of the often higher costs of living abroad. There is a base amount you can exclude (which is $15,616 this year) and it is prorated based on the number of days you are in the country. However, certain countries/cities are more expensive than the average and the IRS increases the allowance. Check the IRS website to see if your country/city is on the list!

4) Don't forget about your FBAR!

This is an important one! The FBAR (Foreign Bank Account Report) is a tool used by the US Treasury Department to uncover tax cheats hiding money overseas. While clearly you aren't a tax cheat, you must play by the rules! Any individual who has more than $10,000 in foreign bank accounts at any point during the year must file FBAR. Penalties for failing to file the FBAR can be steep—in some cases it even involves criminal prosecution. FBAR is filed electronically on FinCEN Form 114. It is filed separately from your US tax return, as it goes to the US Treasury Department, not the IRS. The deadline is June 30 each year and there are no extensions.

5) File by the deadlines!

US taxpayers are familiar with the April 15 deadline, but here's some good news—as an expat you get an automatic 2-month filing extension! Of course, if you owe the US any taxes, you should pay by April 15 because penalties and interest start to accrue then. But in any case, here are the other deadlines you should keep in mind:

June 16th - This is the official deadline for expats filing US tax returns. You can file an extension til October 15.

June 30th - FBAR is due!

September 15th - Final deadline for corporate tax returns (if this applies to you!)

October 15th - Final deadline for those who filed an extension.