5 Tax Tips for American Expats

Tax Tips for Americans Living Abroad

The US is one of only five countries in the world (alongside Libya, Eritrea, North Korea, and the Philippines) that taxes worldwide income.  Of the estimated 8.7 million Americans living abroad, roughly half fail to file their tax returns, either because they don't know they have to or they just find the process too overwhelming to even attempt.  But it doesn't have to be that way, follow these 5 tips to make filing your taxes a little less painful.

1. Use the Foreign Earned Income Exclusion to save

The Foreign Earned Income Exclusion allows you to exclude up to $100,800 of foreign income from US taxation.  In order to qualify, you must have either been physically present for 330 of any 365 day period inside a foreign country, or have lived abroad for longer than one calendar year with no immediate plans to return to the US.

2. Reduce taxes with the Foreign Tax Credit

The Foreign Tax Credit is a dollar-for-dollar credit on the taxes you pay to a foreign country.  You don't need to qualify for this credit and its especially useful if you live in a high-tax country.  For example, if you owe $15,000 in US taxes and you paid $16,000 to the UK, you can completely offset your US taxes because you already paid more in taxes to another country.  

3. Offset some of your housing costs

Those who qualify for the Foreign Earned Income Exclusion may also offset some their living expenses abroad.  There is a base amount you can exclude, which is tied to the FEIE amount but higher exclusions are available for those who live in certain high-cost cities.  The IRS publishes an annual list outlining the exclusions as they may change from year to year.

4. Don't ignore FACTA

FACTA, the Foreign Account Tax Compliance Act, is one of the most controversial initiatives for expats.  Under FACTA, individuals must report their foreign assets if they exceed certain thresholds (which vary by residency and filing status).  As of last year, the US now requires foreign financial institutions to report on the accounts of their American clients.  If you don't report your assets, your bank will and it is critical to do so because penalties for non-compliance can be steep.

5. Track your time spent in the US

If you plan to qualify for the Foreign Earned Income Exclusion with the Physical Presence Test, time in the US is critical.  The requirement to spend 330 days inside a foreign country means 330 FULL days, time spent in the air or on the ocean traveling back and forth doesn't count towards that requirement.  Spending even one day too many in the US can have serious financial consequences so keep an accurate travel log.