US expats are often concerned about the dreaded dual-taxation when filing US taxes. But thankfully, the US has put into place several deductions and exclusions to help reduce that possibility. So we have outlined the top 3 ways to save on your US expat taxes!
1. The Foreign Earned Income Exclusion (FEIE)
This is the most common way US expats reduce (or even eliminate) their US tax liability. The FEIE allows you to exclude the first $99,200 of foreign earned income from US taxation (and $100,800 in 2015). This exclusion isn’t automatic—you need to both qualify for and elect it using Form 2555 or 2555-EZ.
To be eligible for the FEIE, you must pass one of two residency tests: The Physical Presence test (PPT) or the Bona Fide Residence test (BFR).
Under the PPT, you must be physically present inside a foreign country for 330 of any 365-day period. This means FULL days, so any time you spend traveling to and from the US cannot be included in the 330 days. It’s important to track your time carefully, as just spending one day too many in the US can cost you thousands!
2. The Foreign Tax Credit (FTC)
There are a couple of excellent reasons to use the Foreign Tax Credit.
The FTC doesn’t require you to have foreign earned income (just foreign income) and you do not need to qualify to use it. So if you do not qualify as a US expat and you pay taxes on foreign income, you can use the FTC as a dollar-for-dollar credit on that taxes you paid to a foreign country.
In addition, those residing in high tax countries (such as the UK) may actually find that using that using the FTC can save them MORE than using the FEIE! Why? Because you may pay more in foreign taxes than you would owe in US taxes, which leaves you with extra foreign credits. You can use those extra credits to offset future taxes (for up to 10 years) or you can ‘carry back’ the credits and amend last year’s return to potentially receive a refund from the IRS.
Finally, those who qualify for the FEIE could use the FTC in conjunction with the FEIE if income exceeds the $99,200 threshold. In this instance, you may be able to offset the US taxes on the amount of un-excluded income.
For example, if you earn $140,000 (USD), you could exclude $99,200, which leaves you with $40,800 of taxable income in the US. So, the foreign tax you pay on that remaining balance can be offset with the Foreign Tax Credit. If the US tax on the $40,800 of income is less than the foreign taxes you paid, you have no US tax liability.
3. Foreign Housing Exclusion
Higher living expenses are sometimes a consequence of living abroad. As such, the US created the Foreign Housing Exclusion, which allows you to exclude certain housing expenses from US taxation. The Foreign Housing Exclusion applies only to amounts considered paid for with employer-provided amounts. Employer-provided amounts include any money paid to you or paid on your behalf by your employer that are taxable foreign earned income to you for the year. This would include wages, salary, reimbursement for housing expenses or payments by your employer as part of a tax equalization plan.
Examples of qualifying housing expenses include:
The maximum deductible Foreign Housing Exclusion amount varies each year because it is tied to the Foreign Earned Income Exclusion (which adjusts each year for inflation). Here is the basic calculation:
Housing expense limitation – Base Housing Cost = Maximum Housing Exclusion
The Base Housing Cost is the IRS’ calculation of what it would cost if you were living in the US, so there is a housing limitation which must be reduced by the base in order to determine what you can exclude.
For 2014, here are the actual numbers:
$29,760 ($99,200 x 30%) – $15,872 ($99,200 x 16%) = $13,888
So the maximum you can exclude in 2014 is $13,888. However, the IRS publishes an annual list of cities who have a higher housing expense limitation due to an even higher cost of living, so you may want to review that list to determine the exclusion for your city of residence.
Final note: You must qualify for the Foreign Earned Income Exclusion to use the Foreign Housing Exclusion and it must also be elected on Form 2555.
This is not a comprehensive list of ways to save on your US taxes—just the most commonly used ones. While US taxation can be confusing, it doesn’t have to be a financial burden!
Greenback specializes in the expert preparation of US expat tax returns for Americans living around the world. If you’d like Greenback to prepare your US expat tax return, simply click here to get started or visit www.greenbacktaxservices.com for more information.
