American Expat Tax Saving Strategies
The expat life has numerous advantages, but a drawback to being an American expatriate is remaining subject to the U.S. tax code, which reaches across borders and requires U.S. citizens to pay taxes no matter where they live. While there are a number of ways to reduce the amount owed, it is important to minimize risks and ensure compliance.
Bona Fide Residence
Designed to give US Citizens or Resident Aliens who live permanently outside the US a tax break if: they have established residency in a foreign Country. Reside within that country for an entire calendar year. Plan to stay within that country indefinitely.
For example if you live in Ecuador and you run a dive shop, you pay local taxes, have a residency permit and you are not planning on returning to the USA to live then you will probably qualify.
Designed to give US Citizens or Resident Aliens who are outside the US a tax break if: you are in a foreign country for 330 days in a 365 day period, Are legally in a foreign country – Cuba, North Korea etc don’t count. This can be for any 365 day period May to May, June to June etc and can start on any day of the month. Days within the USA – for any reason – don’t count, travel days don’t count towards the 330 day total.
If you have a foreign spouse, choose your tax filing status carefully
Expat Americans with spouses who are neither U.S. citizens nor green card holders are better off if they file Married Filing Separately (MFS) on their return. Avoid at all cost any joint accounts, banking or investments, otherwise, your wife will be subject to the reporting requirements of the IRS, FATCA, FBAR, etc. Even the purchase of a home can complicate things if it is done jointly: the US Expat spouse will be subject to capital gains tax. So better keep it separate.
You need to report all foreign taxes paid in US dollars
The IRS prefers that each transaction be converted at the foreign exchange rate at the date of each transaction. But it’s preferred not required. You should keep a record of when and how much you get paid, including bonuses – most employers have your salary and tax paid on your pay stub. You can look up the FX rates daily, monthly or yearly on the internet.
Foreign Housing Credit Total amount
You are allowed to deduct is based on 30% the FEIE , but If you live in one of the 400 foreign locations which qualify for a higher deduction limit such as London – $83,400, Paris – $84,400, Singapore – $67,000 or Hong Kong – $114,300 you can deduct quite a bit more • You are allowed to deduct “qualified” housing expenses, such as: • Rent, Repairs, Utilities (excluding the telephone), Personal property Insurance, Leasing Fees, furniture rental, etc . Expenses that don’t qualify include: Lavish or Extravagant expenses, mortgage payments, the cost of domestic labor, TV subscriptions, purchased furniture. Note that this is based on the total number of days you are in a foreign country.
Consider contributing to U.S. tax-advantaged accounts
There are many types of U.S. tax-advantaged accounts. If you qualify to invest in one or more of them, they can result in sizeable tax savings over the long run. Some, such as traditional IRAs, 401(k)s, or SEP IRAs, allow you to defer taxable income and potentially lower your marginal tax rates in the current year. Others, such as Roth IRAs, Roth 401(k)s, and 529 plans, offer no tax deferral but investment earnings are never taxable at the federal or state level, making them a bit like perfectly legal offshore accounts. It can pay to carefully research to see whether you qualify for these types of accounts and whether investing in them will save you in tax over the long run. There are many potential trip-ups, however. Check this article about Self Directed IRAs: Invest your IRA anywhere in the world with an Offshore Self Directed IRA LLC.
Avoid making deductible contributions to U.S. tax plans with income on which you’ve already paid foreign tax
Expats commonly make this error, which can result in tax inefficiency and a higher U.S. tax bill over the long run. It involves Expats who have excluded earned income that is taxed locally and who make U.S.-deductible contributions to plans such as IRAs or SEP IRAs. While they may lower their U.S. tax bill by a certain amount in the current year, the current year savings is often not enough to come out ahead over the long run.
Keep records of income: Salary, bonus, interest, rents received, dividends, capital gains, etc. Keep records of Expenses – household expenditures such as rent paid, utilities, etc.; foreign taxes paid or due to be paid; rental property expenses, etc. Keep a detailed travel diary and save your prior years tax return.
Using the tax minimization strategies outlined above with money in the U.S., American expats can benefit from lower taxes, generally lower product and service fees, SIPC protection, more transparent and regulated financial markets, and less onerous tax filing requirements – all without worrying about a call or letter from the IRS.
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