If you’re an American Citizen or a green card holder living overseas, there’s a possibility you also failed to file your U.S tax return this year. There is an estimated 8.7 million Americans living outside the U.S and more than half of them didn’t know they still need to file or maybe having a difficulty doing so. It’s wrong to assume that you no longer need to file your taxes because among the many countries around the world, only two of them including the United States, keeps taxing their citizens regardless of where they live or work.
Failing to file your taxes is somehow understandable because of the already complex process you have to go through, how much more when you’re not physically present in the country. But the law must be followed, taxes have to be paid, there is no getting around that. The IRS now has an easier way to collect taxes from you through FATCA as well and with all of your personal information digitized, it’s better for you to keep up with your taxes than get in trouble in the future.
You can lessen the frustration of preparing your taxes and filing them by following these five tax advice tips we prepared for expats like you.
Don’t Miss Filing Your Tax Return
Let’s start with the obvious. It’s important that you don’t miss filing your tax return and let us tell you why: you’ll be losing more if you don’t file than if you do file. Although the consequences of not filing today may not come right away, it will for sure, come. The longer you disregard it, the more likely it’s going to come after you. To comply can also be a much easier process than most expats assume. As long as your income exceeds the given thresholds which are very low, you must file your tax return from the country where you live. Fortunately, most expats don’t really end up owing any taxes to the U.S because of various deductions, credits, and exclusions that the U.S has granted to those who qualify.
Take Advantage of Foreign Exclusion and Credits
Do not miss the Foreign Earned Income Exclusion to save from your taxes. It allows you to exclude up to $100, 800 of foreign income from being taxed by the U.S. The only requirement is that you must qualify via one of two residency tests. The first one is the Physical Presence test requiring you to be physically present inside the foreign country for 330 days within the 365 day period and the Bond Fide. Resident test, on the other hand, is for those who have lived overseas for one calendar year and no longer have immediate plans to come back and permanently live in the U.S.
Another way to reduce your taxes is through Foreign Tax Credit. It’s a dollar-for-dollar credit on the taxes you pay to a foreign country. This is exceptionally useful if you live in a country that collects very high taxes and you also don’t have to qualify for it. For example, let’s say you owe $10, 000 in US taxes and you paid $11, 000 to the UK. Your US taxes will be completely offset because of the taxes you paid to another country which is more than what you paid to the US. The $1, 000 difference can then be used to as a credit to offset taxes owed in the future.
Report Your Assets Through FATCA
The Foreign Account Tax Compliance Act requires American citizens to report their foreign financial assets provided they exceed a certain threshold which may vary according to your residency and filing status. Starting last year, the US has required foreign financial institutions to report on the accounts of their clients who are American citizens. It looks like a check and balances system which means whether you report your assets or not, your bank will. Failing to report your assets through FATCA as required will result in painful and huge penalties. Although it is the most controversial initiative for expats, it is required and you have to comply to avoid further inconvenience and unnecessary tax payments in the future.
It’s Never Too Late To File
If you’re worried about being behind on your US tax return, you are not alone. Millions of Americans are behind their taxes simply because they did not know they have to file. It’s okay to worry but it’s never too late to file. The best time to get caught up is now. The IRS formed the Streamlined Offshore Filing Procedures to assist innocent taxpayers to get caught up and has recently decided to waive all the late filing and FBAR penalties. Great news right? You don’t have to worry about being late anymore but you still have to hurry while it’s still available because the program might close soon since the IRS didn’t specifically provide a closing date for it.
Document Everything
It can get even more stressful for expats to file their taxes if they don’t have the necessary documents when filing. Make it easier by documenting everything such as all your travel expenses and staying organized. Since the most challenging part of filing tax returns for taxpayers is gathering all the documents, staying organized will shorten the tax preparation process and eliminate the stress altogether!
