Tips for U.S. Expats filing taxes in 2016
Living and working overseas can be an enriching life experience. However, there are still many tasks that U.S. Expat must perform during their tenure overseas. One of the most important is filing a U.S. tax return yearly. This can be daunting for some individuals, especially if finances are complex. The following are several tips for expatriates who are filing taxes in 2016.
Most importantly, File
Many people living abroad fail to file their taxes. Don’t be one of them. Age, filing status, and gross income are the primary determinants of whether one has to file a tax return while working or living out of the country, but almost all expatriates will be required to file. The good news is there is an automatic two-month extension of time to file. However, interest begins to accrue on April 15, the standard due date for tax returns. Be sure to file in a timely fashion or request an extension if needed. Use Form 4868 to file your extension.
Use the Foreign Tax Credit
If you earn money overseas and pay taxes on that income to a foreign country, it can reduce or eliminate your liability for U.S. taxes. The Foreign Tax Credit usually requires Form 1116 to be filled out to determine the amount of liability owed. There are some exclusions as to what can be claimed as a credit. For example, if there are monies that would be refunded as a result of a claim made in the foreign country, that amount cannot be included in the Foreign Tax Credit.
Apply the Foreign Housing Exclusion
Another way to reduce taxes as an expatriate is to utilize the Foreign Housing Exclusion. This allows one to exclude, up to specific limits, housing costs incurred while working overseas. Two tests are used to determine eligibility – either the bona fide residence or the physical presence test. There are several specific requirements that must be met, and it is best to talk to an accountant about whether this exclusion can be utilized.
Be sure to file FBAR and FATCA if required
There are two additional programs which may lead to more filing requirements for Expats. First, there is FBAR, which is the Report of Foreign Bank and Financial Accounts. This is required if you are a U.S. taxpayer and have a foreign bank or financial account with over a $10,000 balance. The form is filed separately from tax returns but due at the same time, April 15.
The Foreign Account Tax Compliance Act, or FATCA for short, is another program. This began as a means to combat offshore tax evasion. It requires some U.S. taxpayers with foreign accounts or assets to fill in Form 8938, and disclose financials, business ownership, and contractual investments with foreign parties. There are specific requirements for this form also, and again, it’s best to speak with an accountant who is well versed in the Act. For Expats, the threshold is $200,000 for Single and doubled for MFJ.
Much like people living in the United States, Expats should document everything that relates to their taxes as the year goes along, rather than scrambling at year end. Keep track of travel, housing, and other expenses, and store all documents together in one place. This will make life so much easier at tax time, even with any extra forms needed for Expats.
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