Tax regulations, as a rule, can be complex and difficult to navigate, but when you live abroad, the process becomes all the more challenging. Regardless of their location, US expat citizens are expected to report their worldwide income and file returns with the IRS each year. This rule applies even if their total income is below the taxable bracket and they’re paying taxes in the new country. When doing your taxes, consult an experienced tax CPA for U.S. expats since they can direct you on the correct forms to fill and income to declare. Here are some helpful tips you can use.
You’ll Claim Exclusions to Avoid Double Taxation.
The IRS has provisions for helping you avoid paying double taxation to two countries on the same income. You can avail of the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit (FTC), and Foreign Housing Exclusion (FHE). However, if you’re claiming the FEIE, you’re not eligible for the FTC. Your tax CPA will direct you to the exclusion, which is more beneficial and can save you more tax.
Even so, you must file your returns, declare income, and request the exclusions since you cannot get them automatically. This you can do by completing and submitting Form 2555 or 2555-EZ. Here’s another rule to remember. Once you claim the FEIE, it remains in effect for every consequent year. If you think you don’t want to use the provision, you won’t be allowed to claim it again for the next five years without getting the go-ahead from the IRS.
You’ll Figure Out Your Residency Status.
Working out your ex-pat status is critical since it can determine the taxes you must pay. To pass the Bona Fide Residency test, you should be physically present in the overseas location for 330 days out of a 365-day time frame. Not only should you have no intention of returning in the immediate future, but you cannot include travel times in the 330 days. Miscalculating your residency status can earn you fines and penalties. But, if you detect the error in time, you can go back and rectify it. The IRS accepts amended returns but within a specific deadline.
You Can Request Extensions
American citizens must file their annual returns by the April 18th deadline, but US expats can request an extension up to June 15th if they cannot get their documents ready in time. Although you must pay your taxes on time to avoid penalties, this extension can prove beneficial for the year in which you’re migrating. Consult your CPA for information about how to take advantage of the IRS exclusions for the latter part of the year when you move to a new location. Special situations may entitle you to a further extension of up to October 15th, which you can get by filing Form 2350.
Complying with the different taxation rules to ensure you avoid penalties and fines is challenging. Your best bet is to consult an experienced CPA and stay on top of your obligations.