25 Things You Need to Know About US Expat Taxes in 2022

US Expat Taxes in 2022

The effort of combing through and comprehending the US tax code can be intimidating. And for US expats, the information is much more complicated and perplexing. We’ve developed a list of the top 25 points as tax advice for us expats that all expats should consider while paying US expat taxes to assist you in sorting through the mountain of information!

Do expatriates have to pay taxes?

The IRS has established unique tax credits and exclusions for Americans abroad to assist expats in avoiding double taxation. Even if you do not owe any taxes, expats who earn more than the filing threshold must file a US tax return.

All American citizens, regardless of where they live or work, are compelled to file and pay US taxes on their worldwide income. As a result, expats are frequently required to file and pay taxes in both the United States and their place of residency.

Because US tax preparation for expats are subject to a variety of particular tax rules and procedures, navigating the filing process can be challenging. Fortunately, this list of the top 25 things you need to know will equip you with the knowledge necessary to confidently manage US expat taxes.

Are you new to the process of submitting expat taxes? Begin by contacting the specialists at Smart Accountants for US expat tax services. Click here to be paired with an accountant who will analyze your specific case and confirm what you need to file.

1. Expats Who Earn Income, Receive Certain Tax Credits or Have Other Special Situations Must File US Taxes Apply

If your worldwide income exceeds the filing threshold (which varies according to filing status), you are required to file an annual US Federal Tax Return.

Income is comprised of the following:

  • Wages/salaries from both domestic and international sources
  • Interest \Dividends
  • Rental Revenue

If you are self-employed, regardless of your filing status, the threshold is $400. Though you qualify for certain credits and reimbursements, you may wish to file even if you are not required to do so. Other circumstances, such as owing special taxes, may also expose you to filing requirements.

2. Expats Automatically Receive a Tax Filing Extension until 15 June

US taxpayers who are living outside the United States on April 18th, 2022 receive a filing extension until June 15th. US taxes, on the other hand, must be paid by April 18th to avoid penalties and interest.

If you return to the United States, you may still be eligible for some US expat deductions and exclusions that year, but you must file before April 18th due to your new status as a resident of the United States.

3. You Can Correct a Previous US Tax Return If You Made an Error Errors happen. If you discover that you did not disclose certain income on your return or that you did not claim all authorized deductions, you must file an updated return for that tax year using form 1040X.

The best course of action is to file an adjustment before the IRS notices the error, as penalties are frequently reduced. Once the initial return is filed, the clock begins ticking, and updated returns must normally be filed before a specified date to be eligible for a credit or refund.

4. The Majority of American Expats Owe No US Taxes

The United States has established numerous critical deductions, exclusions, and credits to ensure that you are not taxed twice on the same income. The majority of expats can offset all of their overseas earned income in the following ways:

  • Exclusion of Foreign Earned Income
  • Credit for Foreign Taxes
  • Exclusion of Foreign Housing

Pay tax on your income only once! Taxpayers in the United States may be able to claim the Foreign Tax Credit on income already taxed in the host country.

To qualify for the exclusions, you must be an official expat with foreign earned income and file your tax return to establish your eligibility.

5. Eliminate or Reduce US Taxes on Foreign Earned Income for Expats

For the 2021 tax year, you may be eligible to deduct up to $108,700 of foreign earned income from your US taxable income using the Foreign Earned Income Exclusion (FEIE)! This is the most frequently used method by expats to minimize or eliminate their US tax liability.

Additionally, certain housing expenses, such as rent and utilities, may be deductible under the Foreign Housing Exclusion.

6. The Exclusion of Foreign Earned Income Is Not Automatic

To qualify for the Foreign Earned Income Exclusion (FEIE), you must first qualify and then opt to use it by submitting Form 2555 or 2555-EZ.

Once you elect to use the FEIE, it remains in effect and must be included on your annual tax return. However, if you decide not to utilise it, you will be unable to claim the exclusion for the next five tax years without the IRS’s consent.

7. To Claim the Foreign Earned Income Exclusion, You Must Pass a Residency Test.

The Physical Presence Test requires that you spend 330 days of any 365 days physically present in a foreign nation.

Under the Bona Fide Residency Test, you must have resided abroad for at least one calendar year and have no urgent plans to return to the United States – this excludes temporary overseas contractors and those on assignment.

8. Keep a close eye on your travel time to ensure you qualify as an expat.

If you intend to qualify via the Physical Presence Test, keep track of your trip days. You must be physically present in a foreign country for 330 consecutive days; any time spent traveling by air (or water) to or from the United States will not be counted. Keep track of your exact trip dates.

A tiny calculation error on your US expat tax return might cost you thousands of dollars!

9. Request an Extension if You Require Additional Time to Qualify

Many expats relocate in the latter part of the year, fearful that they will not qualify for the Foreign Earned Income Exclusion (FEIE) and hence forfeit significant tax benefits. If you believe you may qualify shortly, you may apply for an extension until October 15th, or you may file Form 2350, which provides you with additional time.

10. The Foreign Tax Credit Is One Way to Reduce Your Expat Taxes in the United States

If you live in a nation with a high tax rate or your income exceeds the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit (FTC) may assist you to offset or eliminate your US tax liability.

The FTC is a dollar-for-dollar credit against international taxes you owe. To elect it, you must file Form 1116.

While many taxpayers are eligible for both the international tax credit and the foreign earned income exclusion, if they are also eligible for the child tax credit, choosing the foreign tax credit over the exclusion frequently results in greater tax savings.

11. Foreign Tax Credit Cannot Be Used to Offset Excluded Income

If you elect to exclude a portion of your income under the Foreign Earned Income Exclusion (FEIE), you will be unable to claim the Foreign Tax Credit (FTC) on that income.

For instance, suppose you deduct $108,700 from your salary and are left with $30,800. You can offset only the taxes you pay on the remainder of your income. This avoids what the IRS refers to as “double-dipping!”

If you are unable to claim all foreign income taxes paid or accrued, you can carry them forward for ten years and even back to the previous year.

12. Tax Treaties Assist US Expats in Avoiding Double Taxation

Income tax treaties assist Americans living abroad avoid double taxation by decreasing or eliminating US taxes on certain types of income. The United States now has tax treaties with 68 nations. Because tax incentives differ per country, expats should consult the treaty with their host country to see how they will be taxed. Tax treaties, like any other legal document, can be complex and difficult to grasp. Consult an accountant if you are unsure which rules apply to you.

13. Including Dependent Children on Your US Income Tax Return May Help You Save Money on Expat Taxes

For those with dependent US children (citizens or permanent residents), the Child Tax Credit can be quite beneficial—and even occasionally result in a return! To be eligible for the credit, all dependent children must have a Social Security number issued by the United States.

Additionally, you may be eligible for a tax deduction for child care expenses under the Child and Dependent Care Credit. However, you must have earned revenue to take advantage of this credit. If you utilize the FEIE to exclude all of your earned income, you will be unable to claim the Child Care Credit.

14. The Long-Term Consequences of Including Children on Your US Expatriate Tax Return

Children born overseas to a non-US parent may qualify to be recorded as a dependent on your US Federal Tax Return. While the Child Tax Credit(s) you’ll receive may be financially beneficial, keep in mind that they are now considered US citizens and will always be subject to US taxes unless they opt to renounce their citizenship as an adult.

15. If Foreign Account Balances Exceed the Reporting Threshold, an FBAR Must Be Filed

FinCEN form 114, often known as the FBAR (Foreign Bank Account Report), is a component of the United States’ initiative to combat tax evaders who hide money abroad. You must file if the aggregate balance(s) of all your international bank accounts exceeds $10,000. When it comes to overseas bank accounts, pensions and investments, as well as accounts that you do not control but have signatory authority over, may come into play.

The FBAR is electronically filed through the BSA’s electronic filing system. Even if the account(s) exceeds $10,000 in a single day (or even a single minute! ), an FBAR must be submitted. Separately from your US expatriate tax return, you must file the FBAR.

Do you have any questions? Contact us immediately and we’ll assist you in obtaining the information you require so you can get started immediately.

16. The FBAR Submission Deadline Is on Tax Day

The deadline for filing an FBAR is April 18th (the same date as the federal income tax filing deadline), with an automatic extension to October 17th. Separately from the usual income tax return, the FBAR is filed.

You Might Be Required to File FATCA Form 8938

FATCA, or the Foreign Account Tax Compliance Act, is similar to FBAR in that it is meant to deter US taxpayers from concealing funds in foreign accounts and assets. Form 8938 should be filed if the amount of certain financial assets exceeds the filing threshold (which varies by filing status and residency).

FATCA and FBAR reporting obligations are distinct yet complementary. You may be obliged to file either FATCA or FBAR, or both!

18. Avoid Penalties for Non-Compliance with US Expat Taxes and FBAR Forms

Many expats realize years after moving abroad that they were subject to a US filing requirement all along. They may be fearful of heavy fines and hesitant to pursue delinquent returns.

The IRS, on the other hand, has established several programs aimed at removing or reducing penalties. You may become compliant with the IRS Streamlined Offshore Filing Procedures without incurring late filing or FBAR fines!

Many expatriates are entitled to be caught up by merely filing the last three years of tax returns and the last six years of FBARs. It’s the ideal training for expats who were previously uninformed of their tax filing duties in the United States.

Alternatively, for Americans residing in the United States, the Streamlined Domestic Offshore Procedures are ideal.

19. Giving up citizenship will not help you avoid paying US taxes.

While dissatisfied expats seek renunciation in order to avoid the stress of filing US taxes, they must first establish conformity with US tax laws for the five years preceding the date of renunciation.

If you are contemplating this alternative, keep in mind that you may be subject to an exit tax upon renunciation, depending on your income and net worth. It’s the IRS’s way of ensuring you don’t renounce just to avoid paying a tax liability!

20. If You Retire Abroad, You Can Continue to Receive Social Security Benefits

If you’re considering retiring abroad, rest assured that you can receive your Social Security payments in nearly any country. There are just a few nations that do not allow you to get your benefits, but you may always collect the cash owed to you if you relocate to a country that accepts US Social Security payments.

21. In the United States, Social Security Benefits May Be Taxable

Certain individuals’ benefits will be taxed, while others will not. Social Security benefits must be reported as income on your US expatriate tax return. Generally, if you have other sources of income, you will be taxed on your benefits. However, even if they are, only 85 percent of your benefits are taxable.

22. Agreements on Totalization Determine Which Country Is Responsible for Your Social Security Taxes

The United States has agreements in place with 28 nations specifying which country should get your Social Security benefits. Generally, the agreements allow for the use of credits earned in one nation in the computation of benefits in the other. This is critical because, without such an agreement, you may be obliged to contribute to two systems—and obtain just one benefit!

23. Expats’ Income Earned in the United States Is Not Automatically Tax-Exempt

Income earned on US land is not considered foreign earned income and hence is not eligible for the Foreign Earned Income Exclusion from US taxes.

If you are required to pay taxes on that income in another nation, you may be entitled to use the Foreign Tax Credit to offset the US taxes you owe.

24. You Must Report Rental Income on Your US Tax Return

You must report to the IRS all rental income (international and domestic). Numerous expenses relating to the property, on the other hand, might be deducted from the expatriate tax burden.

Property repairs are immediately deductible, but improvements take a little longer. How can you differentiate? While repairs restore the property to its former state, renovations boost the property’s worth or extend its useful life.

While they are distinct, you should keep track of both repair and improvement spending for your rental property. Repairs are deductible, and renovations are included in the calculation of capital gains or losses on your expat taxes if you sell your property.

25. Certain States Require Residents Abroad to File a State Tax Return

When determining whether or not you are required to submit a state tax return as an ex-pat, one key factor is your intention to return. Each state has its own set of rules surrounding domicile and permanent place of abode, which play a role in determining whether you are regarded as a resident and hence need to file.

For instance, Massachusetts law stipulates that one “may not change his or her domicile by taking a temporary or longer-than-expected leave from the state.” You must have no intention of returning.”

Other states where you may be required to file a state tax return include California, New Mexico, North Carolina, New York, and Virginia. Verify with your state to be assured.