Thursday 2nd June 2011

9 US Expat Tax Pitfalls and How to Avoid Them

The final date of June 15th for the US tax return is fast approaching and if you have yet to complete all the required documentation then now is the time.

Here’s some of the common pitfalls associated with expat tax returns and how you can avoid them.

1) Failing to assert your exclusion

A lot of US expats make the mistake of thinking that because their foreign income is below the exclusion limit they don’t need to file any type of return. Wrong. All US citizens living overseas who want to be excluded from taxes must file Form 2555 to claim that exclusion.

2) Select from a housing exclusion OR a foreign tax credit

US expatriates are entitled to a foreign housing exclusion OR a foreign tax credit on the foreign income. You need to choose one of these.

Foreign housing cost is the cost of housing paid for full year (to a maximum of 30% of foreign earned income exclusion) – base housing cost (16% of foreign income excluded). The excluded amount is permissible if it is less than your overseas income for the year and less than the total housing costs. In addition the deducted amount must also be lower than your total cost of housing AND less than excluded foreign income minus your housing exclusion.

The foreign tax credit generally can be taken dollar for dollar of foreign taxes paid, however…

3) Foreign tax credits can only be claimed on income that is taxable

Form 1116

If any part of the income you have earned overseas has been taxed then you may be entitled to a Foreign Tax Credit. However, a foreign tax credit may not be taken on foreign earned income excluded from tax and calculating what tax credit you may be permitted is actually somewhat of a tricky. Do consider hiring a professional tax accountant to assist you with this form.

4) Failing to complete your FBAR

If you have over $10,000 or more in an overseas bank account then you need to file a Report of Foreign Bank and Financial Accounts (FBAR) by the 15th June. For further information see our article on FBAR requirements.

5) Failing to find appropriate help

There are so many complexitites and pitfalls associated with filing an expat tax return that it really is imperative that you use a qualified expert to help you. Don’t be tempted to call up a guy you knew in the US and ask for his help, you need to use someone who knows expatriate tax requirements inside out. Try and find someone you can trust within your host location as they will be better informed of any tax agreements between that country and the US.

6) Losing key documentation

You need to know where all your tax documents are at all times in the event that you are called upon by the IRS for an audit. Back up everything electronically and ensure that you keep a copy of all important forms, documents, statements and receipts.

7) Failing to consider state taxes

You may find that you are exempt from the U.S. Federal tax but don’t automatically assume that this means you will also not be liable for states taxes. Many states have their own rules and you will need to check them in order to ensure that you remain within compliance.

8) Forgetting about dependency exemptions

There are large number of exemptions that expats regularly forget about and one of these is the dependency expemption. If you have a dependent, even if they do not have a US social security number, you can still claim a dependency expemption.

9) Attempting to file your own taxes

You are probably not a tax professional or an accountant, so why think you’re qualified to complete the complex tax return on your own? Tax laws and requirements and complicated and transient and you cannot possibly keep track of everything that you are required to do. Use a tax professional who can help you to ensure that you get everything right.

For further help and guidance on completing your expat tax return and staying within the law, see our free guide to US Tax Liability

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