Atlanta to Amsterdam!
The United States is the only major nation that taxes its citizens and legal residents on worldwide income.
Even a person who leaves the U.S. and takes up residency in a different country must continue to file U.S. tax returns unless citizenship is renounced.
Expats who file U.S. tax returns face a myriad of challenges. It is important that American citizens living overseas become familiar with the tax treaty between the U.S. and their host country. The U.S. has signed tax treaty agreements with over 60 countries. These treaties spell out any credits, exemptions, or tax rate reductions that can be applied to various sources of global income.
The foreign earned income exclusion, the foreign housing exclusion, and the foreign tax credit can be used to substantially reduce or eliminate U.S. tax obligations of expats.
The foreign earned income exclusion (FEIE) allows an expat to exclude up to $104,100 in foreign-source wages and self-employment income from U.S. federal income tax. The wages or self-employment income will need to be translated into U.S. dollar equivalents. Most people use the yearly average exchange rates posted on the IRS’s website to perform this conversion. Although the FEIE can reduce self-employment income, it cannot be used to reduce the base for self-employment tax. A person must live and work outside the United States and meet either the physical presence or bona fide residence test in order to be able to claim the FEIE.
The foreign housing exclusion and deduction can also benefit expats meeting the bona fide resident or physical-presence tests. The foreign housing exclusion is available to wage earners; the foreign housing deduction is available to self-employed individuals. The federal tax code limits eligible foreign housing expenses to 30% of the maximum foreign earned income exclusion. Therefore, for 2018, the overall effective cap on total qualified housing costs eligible for the exclusion or deduction is $31,230 ($104,100 X 30%). A base housing amount, which is $16,656 or $45.63 per day, is deducted from the qualifying housing costs for determining the maximum exclusion or deduction. The exclusion or deduction is claimed and calculated using IRS Form 2555.
Expats also need to be cognizant of their foreign bank accounting reporting (FBAR) requirements. They need to report their foreign accounts if they have a combined total value of $10,000 or more at any time during the tax year. This reporting is accomplished by filing FinCen Form 114 with the Financial Crimes Enforcement Network which is a bureau of the Treasury Department and by answering the questions in Part III of IRS Schedule B.
Because of the different reporting rules and confusing tax regulations affecting U.S. expatriates, it is often wise to seek help from a trained tax professional. At Massey and Company, we can help you avoid costly penalties and make sure you receive all the tax deductions and exclusions to which you are entitled.
This post was written by Brian Zinner, CPA. Brian has many years of tax and accounting experience, including the tax issues of Americans working abroad. Brian provides assistance to clients at Massey and Company.
If you have questions about tax issues for those working abroad, or any other IRS and state tax issue, feel free to contact us at 678-235-5460.
You may also contact us by email at gary.massey@masseyandcompanyCPA.com, or on our website.
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Gary Massey, CPA
Massey and Company CPA
3 Alliance Center, 3550 Lenox Road NE, Suite 2100, Atlanta, GA 30326