Expat Tax Law…The Basics

As an American expat living abroad, you are responsible for filing your tax return every single year, reporting your worldwide income. Here are some basics that should help you understand the process.

— A guest post by Diane Siriani of www.expatriatetaxreturns.com

Foreign Earned Income Exclusion

Are you a full time resident living abroad for at least 330 days out of any 12 consecutive month time period? If yes, then you may exclude up to $92,900 of your earned foreign income. If married, and both of you are living abroad, you may exclude another $92,900 for your spouse’s income. The trick to this is that you have to file to receive this exclusion; you do not receive it automatically.

The foreign income exclusion only applies to earnings related to work or services. So rental income, retirement distributions, dividends, interest, capital gains, etc. do not apply.

Foreign Tax Credits

If you make more than $92,900 and pay tax in a foreign country, you may also qualify for a foreign tax credit. Since some countries have higher rate of tax than the US, you may be able to accumulate a carryover credit that can help you out in future years.

US Tax Treaties

The United States has Tax Treaties with over 60 countries. Tax Treaties are difficult to understand and, not the same for each country.

Normally, when you work for a US company, social security and medicare is withheld from your compensation. If you work for a foreign company, there are 40 plus countries that have established a Social Security/Medicare Totalization Treaty that accepts the foreign social insurance system in place and exempts you from the need to pay social security and medicare in the US.

Bonafide employees of a foreign employer are not required to pay Social Security tax because you are subjected to foreign laws and their social security tax. If you are an independent contractor, the rules are not as clear cut and a Totalization Treaty must be in place to be exempt from the US social insurance plan.

Avoiding Penalty and Interest on Tax Due

If you think you will owe tax on your foreign earnings, it is best for you to pay estimated taxes periodically throughout the year to avoid penalty and interest assessments. Your final payment for tax due is April 15. Many expats do get confused about this because they are able to get an automatic filing extension to June 15. The June 15 extension, and even the second extension to October 15, is just an extension for filing, NOT AN EXTENSION FOR PAYING. So if you wait to pay, you will assessed failure to pay penalties and interest on the amount due.

Just a note: IF YOU DO NOT FILE AN EXTENSION AND YOU OWE TAX, YOU WILL BE ALSO ASSESSED WITH A FAILURE TO FILE PENALTY…and it can be quite hefty!

Do you Have Additional Questions?

Contact www.ExpatriateTaxReturns.com, we have all the answers!