One of the biggest mistakes American expats living abroad make is to forget about tax. The common assumption is that since you are living in another country, you file your taxes there. But Americans continue to have tax obligations, and opportunities, in their country of citizenship. Find out what you need to know about tax as an American expat so you can avoid these common mistakes.
1. Complete Failure to File
It seems logical that when you no longer live in the United States, you no longer have to file a tax return in the United States. This is wrong, however, and it is the most common mistake expats make regarding tax. If you are a US citizen or US permanent resident, you must complete a US tax return no matter where you live. Taxpayers living abroad are subject to the same tax laws. Make sure you file on time, even when you are filing from overseas. However, there is an extension for Americans living overseas so you have time until June 15th to file from abroad.
2. Failure on FBAR and FATCA
Expats need to know that they have obligations under the Foreign Account Tax Compliant Act (FATCA) related to assets overseas. For example, if you have a bank account abroad and you have more than $10,000 in that bank account you need to fill out Form FINCen114 – FBAR. You won’t have to pay tax on a small amount of savings but you still must fill out the form as the penalties for not doing so can be severe.
3. Failure to Claim Credits and Exclusion Benefits
It’s not all take, take, take, however. You can file for exemptions and credits so you don’t end up paying double tax on everything. Make sure you understand your rights and what you can claim. For example, the foreign earned income exclusion lets you exempt up to $100,800 of any income you earn in an overseas country from US taxation. You can also offset the taxes you pay in your new country against what you need to pay in the US with the foreign tax credit.
4. Forgetting About Your State
State filing requirements differ across the country in regard to factors that determine residency and need for taxation. Some states do not require expats to file a return. Some do. It is important to check so that you do not fall foul of the specific rules governing your home state.
5. Failing to Understand Self-Employment Rules
If you are self-employed and you live overseas you need to look closely at the implications for tax. There are cases where you will continue to pay tax in the US and at the same time in your new country. The laws are complex and it is best to consult a tax professional if you are self-employed overseas.
6. Making a Mistake with Earned Income Credit
The Earned Income Credit system is for people who live away from America and work for a certain portion of the year but it cannot be claimed in every circumstance. For example, if you claim the Foreign Earned Income Exclusion you cannot also claim Earned Income Credit.
7. Paying Too Much Tax
In contrast to paying too little, many Americans living abroad are on the side of caution and end up paying too much. For example, if you are employed by a foreign company you do not have to pay US Social Security taxes.
Remember that even if you feel you do not earn very much, or that the taxes you pay in your overseas home will balance out your US taxes, you still need to file a return. Nothing is automatic apart from the penalties you will receive if you do not file.