Are you a US citizen living and working
overseas? Filing your tax returns is a duty that you are required to fulfill.
But filing tax returns is not the most enjoyable thing about living or working
abroad. Although filing is an obligation, most expats don’t end up paying any
taxes. Here are 4 ways expats can reduce their taxes.
Claim the Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion can
save you thousands of dollars. It is the best way to save on taxes. You can
suffer double taxation if you fail to claim the Foreign Earned Income
Exclusion. Imagine being forced to pay taxes to the United States for income
that you have already been taxed in your host country. Fortunately, the
Internal Revenue Service understands this predicament, hence the provision of
the Foreign Earned Income Exclusion.
This exemption allows expats to exclude the
first $105,900 of the foreign earned income from their 2019 tax returns (filed
in 2020). However, to take advantage of the Foreign Earned Income Exclusion,
you must pass one of the two residency tests:
·
The Physical Presence Test: You
must be in a foreign country for at least 330 full days in a 365-day period.
·
Bona Fide Residence Test: Here,
expats must live outside the US for a full calendar year, and must not be
intending to return to the US in the foreseeable future. Such expats must also
show that they have established residency in a foreign country.
Take advantage of the Foreign Housing Exclusion
The cost of living outside the United
States can be very high. Fortunately, the IRS understands this and has come up
with some ways to offset this for US citizens living abroad. Foreign Housing Exclusion
is one such way. It allows US expats to exclude their housing expenses (up to a
set limit) from their taxable income. With Foreign Housing Exclusion, you can
exclude the following expenses:
·
Rent
·
Parking fees
·
Household repairs
·
Utilities
·
Property insurance
Expats who wish to claim the Foreign Housing Exclusion must:
·
Qualify for the Foreign Earned
Income Exclusion
·
Demonstrate they have
qualifying housing expenses
·
Have paid their housing
expenses from employer-provided funds
·
Have housing expenses that exceed
the set minimum
Claim the Foreign Tax Credit
Claiming the Foreign Tax Credit can save
you huge bucks. The Foreign Tax Credit is a dollar-for-dollar credit on every
dollar you have paid as tax to your host country. Of course, you can’t claim Foreign
Tax Credit on income you have already claimed Foreign Earned Income Exclusion.
You can only use Foreign Tax Credit on income above the Foreign Earned Income
Exclusion limit.
File on time!
Claiming exemptions is a great way for
expats to save on their taxes. Filing your tax returns on time can also help
you save on your taxes. You see, every tax due after the deadline begins to
accrue interest from that day onward. Filing returns from abroad is not easy.
It is a complex process with a lot of reporting needed and exemptions to be
claimed. You should consider seeking help from incredible platforms such as https://taxfyle.com/taxes-for-expats.
More often than not, this will save you time, money and stress.
