Frequently asked questions
U.S. Expat Deductions and Credits
What deductions and credits are available for U.S. expats?
U.S. citizens living abroad have several tax deductions and credits available to help reduce their expat tax burden and potentially secure a refund. Here’s a comprehensive overview of the options available for the 2024 tax year:
Foreign Earned Income Exclusion (FEIE): One of the most common deductions for U.S. citizens living abroad, the FEIE allows you to exclude up to $120,000 of your foreign earned income from federal income taxes. To qualify, you must meet either the Bona Fide Residence Test or the Physical Presence Test. This exclusion is calculated using Form 2555 and helps prevent double taxation on the same income earned abroad.
Foreign Housing Exclusion or Deduction: This benefit allows you to increase the amount of income exempted from tax by including qualified foreign housing expenses. Available to salaried employees, wage earners, and self-employed individuals, the exclusion varies based on the cost of living in your foreign country of residence. This deduction is in addition to the FEIE and is crucial for those with significant housing expenses abroad. For self-employed individuals, the foreign housing deduction allows you to deduct certain housing costs from your taxable income, complementing the Foreign Earned Income Exclusion and Foreign Housing Exclusion.
Foreign Tax Credit (FTC): The FTC is invaluable for U.S. citizens who pay taxes to a foreign government. It provides a dollar-for-dollar reduction on your U.S. tax liability for foreign income taxes paid. Unlike the FEIE, the FTC does not require residency proof, making it an excellent option for those involved in foreign investments. Use Form 1116 to calculate the credit, ensuring that the taxes are legally imposed on your income. This credit helps eliminate double taxation and is crucial for U.S. citizens paying foreign taxes at a rate equal to or higher than the U.S. tax rate.
Child Tax Credit and Additional Child Tax Credit: For families, the Child Tax Credit offers up to $2,000 per qualifying child under age 17, with $1,600 being refundable. These credits help offset your tax liability and can be claimed on Form 8812.
While you cannot claim the Child Tax Credit if you use the FEIE, the Additional Child Tax Credit is available alongside the FTC, allowing you to receive a refund if your credit exceeds your tax liability.
Tax Treaties and Totalization Agreements: Tax treaties between the U.S. and foreign countries define what income is taxable in each jurisdiction, potentially reducing your tax liability. These treaties prevent the U.S. and the foreign country from taxing the same income, such as dividends or royalties, and can be particularly beneficial for passive income earners. Totalization agreements help U.S. expats avoid double payment of Social Security taxes and ensure the recognition of contributions across borders.
Itemized Deductions: As an expat, you can also take advantage of various itemized deductions to lower your taxable income. These include mortgage interest on your primary residence, medical expenses, charitable contributions, and real estate taxes. Contributions to a U.S. charity that supports foreign organizations are also deductible, as are property taxes paid to a foreign government.
Special Considerations for Self-Employed Expats: Self-employed U.S. citizens must pay self-employment tax, which funds Social Security and Medicare. While the FEIE does not exempt this tax, you can deduct self-employment taxes on your U.S. tax return. Totalization agreements may also help minimize double contributions.
Understanding these deductions and credits is vital for minimizing your U.S. tax liability while living abroad. Your income and filing status collectively influence whether a tax return must be filed and determine the availability of specific deductions and credits. Consulting a tax advisor specializing in expat taxes can provide tailored advice to maximize your tax benefits. Whether dealing with foreign housing expenses, foreign financial accounts, or foreign financial assets, being informed ensures compliance with U.S. tax laws and optimizes your tax situation. Always file your income tax returns accurately to take full advantage of these provisions and avoid penalties from the Internal Revenue Service.
How do I qualify for Foreign Earned Income Exclusion?
To qualify for the Foreign Earned Income Exclusion (FEIE), which allows U.S. citizens living abroad to exclude up to $120,000 of foreign earned income from taxable income, you must meet these criteria:
- Tax Home in a Foreign Country: Your tax home must be outside the U.S., meaning your main place of work is in a foreign country. This is essential for claiming foreign earned income and the foreign housing exclusion.
- Foreign Earned Income: You must have income earned from work in a foreign country. This excludes passive income like dividends or interest.
- Meet One of These Tests:
- Bona Fide Residence Test: You must be a bona fide resident of a foreign country for an entire tax year. This depends on the length of your stay and nature of your employment.
- Physical Presence Test: You must be physically present in a foreign country for at least 330 days within any 12-month period. This test is based solely on time spent abroad.
When selecting your 12-month period, you can choose any timeframe that maximizes your exclusion. This flexibility allows you to overlap periods if needed. The FEIE helps reduce double taxation on your worldwide income, although you may still owe U.S. self-employment tax if applicable. To claim the exclusion, you must file Form 2555 and ensure compliance with foreign bank account reporting under FATCA.
Understanding these requirements is crucial for minimizing tax obligations for U.S. citizens living abroad. Consulting a tax advisor can help navigate expat tax laws and maximize available benefits. Contact us for free personalized tax advice
What are itemized deductions?
Schedule A is used to claim itemized deductions and there are seven categories: medical and dental expenses, taxes, interest, gifts to charities, causality and theft losses, job expenses and certain miscellaneous deductions. These include things like state income taxes, mortgage interests on a principal residence or on a holiday home, and property tax on your principal residence.
By using itemized deductions, you can also claim charitable contributions to U.S. charities. Donating to charity can add up, but your donations must be made to organizations under U.S. laws. Canada and Mexico have treaties with the U.S. that allow deductions for contributions to be made to certain Canadian and Mexican charities. You can also claim unreimbursed employee business expenses above 2% of the adjusted gross income. You can deduct moving expenses, and in later years, have deductible storage expenses, which can be claimed throughout the foreign assignment.
If your medical expenses exceed 10% of your adjusted gross income, then you can deduct part of them. If you or your spouse were born before January 2nd, 1951, then you may deduct medical and dental expenses that exceed 7.5% of your adjusted gross income, or 10% if you are 65 or under. Some deductible expenses include insurance premiums for medical and dental care, prescription medicines, medical examinations, diagnostic test, nursing help, surgeries, medical aids etc.
The next itemized deductions include local and state income taxes or local and state sales taxes, but not both. Typical deductions include real estate taxes and personal property (vehicle) taxes. If you’re a homeowner, this includes mortgage interest and it can sometimes be advantageous to itemize if you own a home. You can also deduct mortgage insurance premiums and points associated with mortgages.
Talking about causality and theft losses: if you have faced loss to your property due to casualty, disaster or theft, you will be able to take a deduction for the loss. The process can be quite complex, and you will have to complete a special tax form (Form 4684) in order to support the claim.
Certain unreimbursed expenses related to your job may be deductible as well. You can also deduct your U.S. expat tax preparation services, in addition to other things like expenses incurred to earn taxable income (investment expenses, safety deposit boxes etc.). It is worth noting that you must total all of these expenses. Only the amount that exceeds 2% of your adjusted gross income can be deducted. Other miscellaneous deductions contain a variety of deductible expenses, such as gambling losses, losses from partnerships, unrecovered pension investments, and impairment-related work expenses for a disabled person.
So, there are many things to consider. Contact us now and we will be happy to explain how it works, and also make sure that you reduce your taxable income by claiming the maximum deductions.
Am I Eligible for the Child Tax Credit as a U.S. Expat in 2024?
As a U.S. citizen living abroad, you may be eligible for the Child Tax Credit if you have a qualifying child and earned income that meets the IRS requirements. To qualify, your child must be under 17 years of age as of December 31 of the tax year and must be a U.S. citizen, U.S. national, or U.S. resident alien with a valid Social Security number. There is an exception for legally adopted children, who are treated as your own.
You must have earned income from employment or self-employment to claim the Child Tax Credit. The credit amount is tied to your earned income and can reduce your federal income tax by up to $2,000 for each qualifying child. The credit is refundable up to $1,600, meaning if you don’t owe any tax before claiming the credit, you can receive up to $1,600 as part of your tax refund.
The credit begins to phase out if your modified adjusted gross income exceeds certain thresholds: $200,000 for single filers and $400,000 for married couples filing jointly. This means more families with children under 17 qualify for the credit, even those with higher incomes.
Your child must live with you for more than half of the tax year, and you must claim them as a dependent on your federal tax return. Exceptions to the residency test may apply in certain circumstances. It’s important to consider how the Child Tax Credit can impact your expat tax obligations and how it interacts with other deductions and credits, such as the Foreign Tax Credit or foreign income exclusion.
For U.S. citizens living abroad, understanding eligibility and maximizing the Child Tax Credit is crucial for effective tax planning. Consulting with a tax advisor can help navigate complex tax laws, ensure compliance, and optimize tax benefits related to foreign financial accounts, state income taxes, and other expat tax considerations.
Feel free to contact us for guidance on how to effectively utilize the Child Tax Credit and other tax benefits available to U.S. expats.
Understanding Self-Employment Tax for U.S. Expats in 2024
If you are a self-employed U.S. citizen or resident, the rules for paying self-employment tax remain consistent, even if you live abroad. The self-employment tax is a social security and Medicare tax on net earnings from self-employment, applicable regardless of where the work is performed globally. If your net earnings are less than $400, you won’t need to file a U.S. tax return. It is crucial to consider all your self-employment income when calculating your net earnings.
As of 2024, the self-employment tax rate is 15.3%, consisting of two parts: 12.4% for Social Security and 2.9% for Medicare. The maximum amount of net earnings subject to the Social Security portion of the tax is $160,200. All net earnings are subject to the Medicare portion.
The U.S. has established Social Security Totalization Agreements with various countries, preventing double taxation of social security taxes for expats. If you reside in one of these countries, you typically do not need to pay U.S. self-employment tax, as you would pay social security taxes in your country of residence. Countries with a Totalization Agreement include Australia, Canada, France, Germany, Italy, Japan, and the United Kingdom, among others.
If you are a digital nomad without a fixed country of residence, you must pay U.S. self-employment tax. For those not living in a Totalization Agreement country, you may be required to pay social security tax in both the U.S. and your host country. To minimize your tax burden, some expats establish their business as a foreign corporation and become employees of that corporation, thereby avoiding self-employment tax on their wages. However, this requires filing Form 5471 to report your interest in the foreign corporation each year.
Self-employed expats can also take advantage of the foreign housing deduction to lower their taxable income. This deduction covers qualified housing expenses incurred while living abroad, helping to reduce overall tax liability.
Not contributing to U.S. Social Security can impact your future retirement benefits, so it is essential to weigh immediate tax savings against potential long-term effects. For self-employed expats, understanding these tax obligations and options is crucial for effective tax planning and compliance.
