5 Tricks to Legally Reduce Your US Expat Taxes
Are you looking for some neat tricks to reduce your US expat taxes the right way — that is, legally?
If you are, then you’re in the perfect place.
Reducing your US expat taxes doesn’t have to be complicated and underground, nor do you need to search high and low for the right tricks.
You can uncover provisions for these from the US expat tax laws. They specify exemptions and deductions you can avail that significantly minimize your taxes.
That said, let me share with you five tricks for you to reduce your US expat taxes legally.
Let’s get to it.
1. Take advantage of the FTC.
The Foreign Tax Credit (FTC) is strategic when your tax rates abroad are higher than that of the US.
The FTC is an attractive choice since each dollar of this credit cancels out another dollar of your US income tax.
Essentially, two factors limit the amount of FTC you can take.
One is the amount of paid or accumulated international taxes. The other is the amount of your US taxes that would have been subject to the same income earned abroad.
The ceiling of your FTC claim, then, is the amount that is lesser between the two factors.
Let’s say you work in a lower-tax country like Singapore.
Assuming you worked there for the whole year and your entire income comes from that place, your international tax scenario may appear like this:
$ 300,000 x estimated 20% tax rate = $ 60,000 Singapore income tax
$ 300,000 x estimated 30% tax rate = $ 90,300 US income tax
$ 90,300 – 60,000 = $ 30,300 US income tax still owed
Take note: in this instance, the total dues for your worldwide income tax is the same amount as your highest tax rate, although you had to pay the income taxes for two separate countries.
2. Maximize the FEIE.
The Foreign Earned Income Exclusion (FEIE) is the most sizeable tax benefit you can avail as a US expat.
Maximizing the FEIE alone is profitable when your total wage income is lesser than the exclusion limit for the year. FEIE can exclude 100 percent of the revenue, so you don’t owe any federal tax.
For instance, the annual exclusion limit for 2018 is $ 104,100. For 2019, it is $ 105,900. The Internal Revenue Service (IRS) adjusts the amount for inflation.
For you to lower your expat taxes with FEIE, you first have to ensure that you qualify.
You have to confirm your international tax residency because FEIE does not apply to short-term job appointments outside of the US.
To determine your FEIE qualification, you can take these tests:
- Physical Presence Test: When you have spent 330 of 365 days overseas.
- Bona Fide Residence Test: If you’re a legitimate resider in a foreign country for a continuous period that covers a full tax year.
You should know, though, that you can’t use as FTC those paid international taxes related to the income covered by FEIE.
3. Capitalize on Child Tax Credit.
This tax deduction applies when you have children as your dependents.
With it, you can receive credits of a maximum of 2,000 dollars for every eligible child.
Note that you cannot claim the Child Tax Credit with FEIE, but you can do so with FTC. Applying for the Additional Child Tax Credit will also help you get any outstanding credit refunded.
Your child dependent can qualify for this credit if he is a US citizen or resident in a foreign country, 16 years old or younger as of December 31 of the tax year, and others.
On another note, the US and some countries keep a Totalization Agreement, which details the amount of “credits” accumulated for social security plans or old age according to your job and salary.
Before you can claim the benefits, confirm first if the country you’re residing in has this agreement with the United States.
4. Leverage the Foreign Housing Exclusion.
Foreign Housing Exclusion is another option you can take if your cost of living abroad often exceeds that in the US.
This deduction is an extension of FEIE. It reduces your US expat tax by applying the foreign housing expenses you’ve paid to augment your FEIE for the year.
Depending on the foreign country you live in, the permitted exclusions for your housing abroad may differ according to limitations.
To be eligible, you need to meet these criteria:
- You qualify for and have claimed your FEIE;
- You’re a self-employed individual, salaried employee, or a wage earner;
- Reasonable and approved overseas housing expenses (such as rent, furniture and accessories rental, utilities other than phone charges, real and property insurance, etc.);
- Housing expenses paid with employer-supported funds (covered by your regular salary or by your employer);
- Housing costs are higher than the base amount specific to your area of residence.
5. Use the International Tax Treaty.
Some foreign countries, like Canada and the United Kingdom, have international tax treaties with the US.
Tax treaties are two-way or bilateral agreements between two countries (one of which, in this case, is the US) that address matters on double taxation of your income.
These documents indicate the aspects that can and cannot be taxed in a specific country.
A deduction from this tax treaty prevents one country from charging income and fees that have been taxed already in your resident country.
If you earn this kind of income and work in a country with tax rates lower than the US, a tax treaty deduction will be advantageous for you.
You can reduce your taxes on these general kinds of income:
- Charitable donations
- Personal exemptions
- Alimony payments
- Qualified retirement contribution
- Real estate taxes on your residence
- Mortgage interest
- Medical spending
You can exempt your donations to a US charitable institution that transmits money to a foreign non-profit organization.
You can even subtract the real property taxes you pay for that the foreign country charges to you.
Keep in mind that international tax treaty provisions vary depending on the country, so be sure to consult your tax specialist regarding this.
Final thoughts
As a US expat, it’s best if you take advantage of these deductions provided for by the national government to minimize your tax returns.
Many US expats have availed of these and enjoy the significant percentage of reduction.
Consider applying for these exemptions as you prepare for tax filing for the next year.
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