Moving? Recently moved to another country? What you need to know about US expat tax preparation before you go
The more you know about expat tax preparation requirements before you move abroad, the better prepared you will be to file a complete, accurate tax return and maximize your savings. It is imperative that you gather as much information as you can before you move to another country, because you want to be prepared to file your US expat taxes during the next tax season. In this article we will go over five key points regarding expat tax preparation to ensure that you have all the information you need to file your US expat taxes. The top five things you should know are:
That you get special tax credits and exclusions when filing abroad,
Each state has individual regulations,
How to make sure you get your important mail and leave the junk behind,
The US filing dates,
How your US income will be treated compared to foreign income,
We will go into more details on each of these throughout the article.
Special Tax Credits and Exclusions When Filing as a US Expat
First, it is important to understand what is required of you as a US expat living in a different country. Even though you are no longer living in the United States, you still need to file your US expat taxes. However, you also get some special tax credits and exclusions as a US expat and it is important that you know what they are. It is of extreme importance that you disclose any offshore bank accounts that you have to the US Treasury in addition to filing your US tax return each year. If you have over ,000 USD or the foreign equivalent in one or more foreign accounts (cumulative), you are required to report this every year. If you fail to report these accounts it may result in fines starting at ,000 and/or prosecution. You report your foreign bank accounts on Form TDF 90-22-1.
There are two forms that expats can use to help them save money when filing their US tax return from abroad – Form 2555 and Form 1116. Form 2555 is used to exclude a large amount of the income (for 2010, it was ,500) that you earned while living overseas from US taxation. Even if you make less than ,500 in a year, it’s still extremely important that you file your taxes for that year or you may be liable for penalties and interest.
Form 1116 protects those who are paying income taxes to a foreign government. The downside of this form is that it also comes with a lot of restrictions that you need to familiarize yourself with before you try to complete this form. Essentially, Form 1116 gives you a US tax credit for the taxes you paid to a foreign government. The US government is not unreasonable and recognizes that if you have paid another country’s taxes you will not be able to pay that same money to the US. In order to be eligible for the benefits of this form, you need to qualify for residency in the foreign country or live outside the US for a minimum of 330 days each year. A word of caution – these forms are not easy to understand or fill out so we recommend that you hire an expert to help you complete them.
You Need to Understand The Specific Regulations of the State You Previously Resided In
The second thing on the expat tax preparation list should be deciding if you need to sever ties with the State that you formerly resided in. Many States in the US try as hard as they can to continue to collect State taxes from expats, even if the expat has been out of the US for years. By severing as many ties with the State as you can before you leave, you are giving yourself the best opportunity to avoid paying unnecessary taxes.
This advice may sound extreme and there are many States with more favorable tax terms for expats. Alaska, Florida, Nevada, Texas, North Dakota, Washington and Wyoming don’t have any State income taxes making these states ideal for both residents and expats! On the other hand, States such as California, South Carolina, Virginia and New Mexico make it incredibly difficult to get rid of your State residency status while living abroad – meaning they still want you to pay taxes even though you are not living in the State. In order to remove your residency from these States the expat will usually have to prove to the State government that they are not planning on becoming residents of that State again. This is typically very hard to do and requires replacing many records with your permanent address in your new country of residence, such as drivers license, bank accounts, etc. Because of this difficulty, the best thing you can do to avoid paying unnecessary State taxes is to get rid of as many physical ties, such as mortgages, bank accounts, and bills, as you can before you move.
Getting Your Mail: Make Sure You Have a Well-Thought Through Plan as to how you will receive documents needed to file your return
Third, it is important to consider how you will deal with your US mail while you’re living abroad. You will always receive some mail while you are living and working abroad, so you need to consider what you will do with that mail. The first thing you should try to do is get electronic statements for everything you can – bank statements, credit cards, mortgages, etc. Then you should call 1-888-5OPT OUT (1-888-567-8688) to say you don’t want the credit rating bureaus to sell your details. This will allow you to avoid receiving all those credit card offers that pile up in your mailbox. The next thing we recommend is that you consider hiring a mailbox forwarding service. We started using a mailbox scanning service called Mailbox Forwarding, which charges about per month to receive up to 40 items and to scan 10 of them for you. This has proven to be money well spent! There are many other services like this one such as Earth Class Mail (mailbox forwarding just happens to be our favorite). If you do decide to use them, we are an affiliate so would appreciate if you sign up for mailbox forwarding here (affiliate link).
It is also imperative that you notify the IRS if you are planning on changing your address to ensure that you receive all of the correspondence from them. There are a couple of ways to do this. The easiest way to change your address is to have it officially changed before you file your return, that way you can simply change your address on the mailing label that you send back to the IRS, and they will update your account accordingly. If you change your address after you file your taxes, you need to notify the post office and send a completed form 8822 to the IRS. This will ensure you receive any refund checks.
Deadlines and Dates: Make Sure You Meet Them!
A very important part of expat tax preparation is remembering the filing dates, which are different for Americans living abroad. It’s also important to know whether or not you qualify for an extension and if you do, how to file for one. Normally, the deadline to file your taxes as a US resident is April 15th. However, if you are an expat living abroad, the deadline to file your taxes is extended until the 15th of June. This extension gives you some wiggle-room in case your host country has different filing deadlines to receive your foreign tax documents and to allow you to get any important items you will need from the US (setting yourself up properly in step 3 can save some of the hassle of waiting for US documents). If you need to, you can also apply for an additional extension until October 15th of the same calendar year by completing Form 4868. Please note, if you need to submit the Form TDF 90-22-1 (foreign bank account form) to the Treasury, you must submit it by the end of June each year (June 30th), and there are no exceptions.
How will US income vs foreign income be treated?
One final item that is pertinent to your expat tax preparation is to consider how US income will be treated differently than your foreign earned income. For example, if you rent your house or if you earn interest and dividends in the US, this will be taxed differently. The foreign earned income exclusion (filed through Form 2555) offsets income for workers that are living abroad and is only for foreign earned income. This means that your US based income will still be subject to the same taxes as if you were still living inside the US. The expat deductions allow you to exclude most of the income you make. You will also be able to deduct living and housing expenses that you incur while living abroad, but they still don’t do much to protect your US based income.
As you can see, there are a lot of things to consider before moving abroad to live and work as an expat. Expat tax preparation is incredibly important and you will make it much easier for yourself and your family if you do your due diligence before you leave. Following these recommendations will help to ensure that you file your taxes correctly and that you save as much money as possible.