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Answers to the Top 3 U.S. Expatriate tax questions

Answers to the Top 3 U.S. Expatriate tax questions

There are surprises in life and then there are surprises.

A surprise is when a friend visits you unexpectedly. A surprise is thinking that you are owed a tax refund, then finding out that in fact, have to pay. Having to file U.S. taxes while living abroad often comes as a surprise to U.S. expats.You know you have to file them in the States, but most people at first assume that once you move abroad you don’t have to any more.

If you recently moved abroad, you likely have a lot of questions. It’s important to research your expatriate tax obligations, be prepared for the tax season, and make good tax choices throughout the year, not just at tax time. Here are the Top 3 questions new expats tend to wonder about the most:

Q: Do I have to file U.S. taxes even if I’m living overseas?

A: Yes, Yes, Yes! We can’t emphasize this enough. The United States is one of just two countries in the world that requires its expatriate citizens living abroad to file a tax return. While this might be a surprise, it doesn’t have to be a surprise.

At first glance, it doesn’t seem fair, but most expats don’t end up owing any U.S. tax if they claim available exclusions and credits when they file. The bigger surprise will come if you don’t file U. S. expatriate taxes at all. Thanks to banking agreements and other regulations, the Internal Revenue Service will be aware of your residency and financial status and will be looking for your tax return.

Q: Do I have to report foreign bank accounts?

A: This one may come as another surprise, but the answer is a definite yes. The U.S. government is looking to track income acquired illegally and then stashed in foreign bank accounts. It has agreements with countries around the globe to share banking information. A law called FATCA and international treaties allow the free exchange of tax and banking information with other countries. So if you open an international bank (or investment, or pension) account, the Foreign Account Tax Compliance Act will notify U.S. officials about the action, allowing the government to follow up with your tax filings.

If you don’t report your accounts, the IRS is sure to want answers.

Q: How can I reduce my U.S. tax bill?

A: There are many strategies you can take to reduce your tax obligations. Among the most popular are credits and exclusions that reduce your tax burden significantly or often remove it altogether. The government recognizes that you have tax responsibilities to your new country and it provides for that in order to prevent double taxation.

The Foreign Tax Credit is intentionally designed to reduce overall liability if you had no choice but to pay the foreign tax, like with a paycheck.

The Foreign Earned Income Exclusion allows those living overseas to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation. For 2020, that number is $107,600.

Most often Americans living abroad hire an expatriate tax professional to ensure they file to their best advantage.

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