Now that we're nearing a new year, it's time to start thinking about filing your 2016 US expat taxes. Every year, you can count on the IRS to release updates to the tax brackets, exemptions and deductions – which typically change with inflation. Get the facts you need in order to determine your tax bracket and more before Tax Day arrives!
Income Tax Changes
While tax rates will not be changing, the income that falls within the brackets will be tweaked for the 2016 filing year, as follows:
The top tax rate remains 39.6%, which applies to single taxpayers whose income exceeds $415,050 or married filing jointly taxpayers whose combined incomes exceed $466,950.
The standard deduction on your US tax return will remain $6,300 for single filers and those who are married filing separately. For married filing jointly taxpayers, the amount is doubled to $12,600. If you file Head of Household, your standard deduction will increase by $50, from $9,250 to $9,300.
Also, personal exemptions will increase from $4,000 to $4,050. Note that this begins to be phased out for higher income levels. For example, it begins to phase out for a single filer with an Adjusted Gross Income of $259,400. Once you reach $381,900, the exemption is entirely gone. For those married filing jointly, the phase out begins at $311,300 and is completely erased at $433,800.
Other Changes That May Affect Your Expat Taxes
- The Foreign Earned Income Exclusion: For the 2016 filing year, eligible taxpayers living abroad will be able to deduct $101,300 of foreign earned income on their US taxes. You may even be able to eliminate your US tax liability entirely with this one exclusion!
- Earned Income Credit: This generally applies to low-income taxpayers who have children, and the more children you have, the more likely that you'll qualify. For the new tax year, the maximum Earned Income Credit amount rises to $6,269 for taxpayers filing jointly with 3 or more qualifying children – this is up from a total of $6,242 last year. Note that you will not be eligible for the Earned Income Credit if you use the Foreign Earned Income Exclusion.
- The Affordable Care Act (ACA): The ACA calls for a penalty for US citizens who don't have qualifying health insurance coverage, unless you qualify for the Foreign Earned Income Exclusion through the Physical Presence Test or Bona Fide Residence Test or are enrolled in a US expat health plan. In those cases, you'd be exempt and need not worry about this penalty. Unfortunately, if you don't qualify for an exemption or have qualifying coverage, you will need to pay the tax penalty. There are two calculations and the IRS charges the greater of the two:
- A percentage of income, which is 2.5% of household income above tax-filing threshold ($10,150 for individuals), or
- A per-person calculation of $695 per adult and $347.50 per child, with a family maximum of $2,085
Each of these changes could affect you as a US expat, so it's important to do your research to understand the impact they could have on your 2016 tax return. It's best to get prepared now, so there will be no surprises come tax time! For more ideas on how you can begin to prepare for the new tax year ahead of time, check out our year-end tax planning tips.