Managing your tax obligations can be complicated for US expats. As a US citizen living abroad, you still have to file a US tax return, and you may have to pay local taxes in your country of residence, too. Fortunately, the IRS and local governments have put provisions in place to help alleviate this burden. Knowing about and claiming these provisions is the key to saving money as an American living overseas, as they can not only help reduce or even eliminate your US tax bill, but sometimes you can even claim a refund you didn't know about!
Understanding these tax benefits and how they work is essential to avoid paying taxes twice on the same income and saving money in general. In this article, we'll take a look at how to avoid double taxation and save money when filing your US taxes from abroad.
What is double taxation?
In simple terms, double taxation occurs when you're required to pay taxes on the same income in two different countries. For example, as a US citizen working as a sales manager in France, you'd typically be required to pay both French taxes and US taxes on the same earnings. This is also true for Americans living abroad and working remotely either as freelancers or for a US firm. While there are tax treaties in place between the US and many other countries, unfortunately, they don't automatically prevent double taxation for Americans living overseas; rather, you will need to be able to claim expat-specific tax benefits to ensure you don't overpay taxes.
Why does double taxation exist in the first place? Ultimately, it comes down to the US having a citizenship-based taxation system. All US citizens are liable for US taxes, whereas most other countries only tax residents or income earned in the country.
How to save money on your US tax return
Country specific
The US has two types of international tax treaties, and while they don't prevent Americans living abroad from filing, some of them contain provisions that can save money in certain circumstances.
- Country-specific tax treaties - The US has tax treaties with over 60 other countries, and some of them contain specific provisions such as not taxing US retirement plan distributions or gambling winnings, or royalties, for example. This means that some expats in certain countries can still benefit from tax treaties. If you might be able to benefit from a US tax treaty, you'll have to file IRS Form 8833 as part of your US tax return.
- Totalization Agreements—These treaties prevent double social security taxation. If you are an American freelancer living and working in another country, you may have to pay social security taxes in that country and in the US. However, a Totalization Agreement can prevent this, with your contributions going towards your entitlement to future payments in either country.
Non-country specific expat tax benefits
The following is a list of expat tax benefits available to Americans living overseas:
- Foreign Earned Income Exclusion (FEIE): Expats can exclude up to $126,500 (for 2024) of their earned income from US tax if they qualify as a bona fide resident abroad or are physically out of the US for 330 full calendar days. File Form 2555 to claim the FEIE.
- Foreign Tax Credit (FTC): Are you paying income taxes in your host country? If so, then you can claim the FTC as a dollar-for-dollar credit on your owed US taxes. This is ideal for those living in a country with a higher income tax than the US, such as most European countries or Japan. Claim the FTC on Firm 1116.
- The Foreign Housing Exclusion: If you rent your home overseas and claim the Foreign Earned Income Exclusion, you can claim the Foreign Housing Exclusion to exclude a further amount of your earned income from US tax.
- The Child Tax Credit: If you claim the Foreign Tax Credit, you can also claim the Child Tax Credit. You are entitled to a refund for each child if you don't have any US tax liability.
Steps to avoid double taxation
When filing for the Foreign Earned Income Exclusion or Foreign Tax Credit, it's essential to keep these tips in mind:
- Keep accurate records: Document all your income, foreign taxes paid, and other relevant financial information. This will be essential for claiming either the FEIE or FTC.
- Claim the right exclusion or credit: Review both options to determine which is more beneficial for your situation. The FEIE can exclude a certain amount of your foreign income, while the FTC allows you to offset taxes paid to a foreign government.
- File on time: Even if you're living abroad, ensure your tax returns are filed on time to avoid penalties or interest.
To fully comply with US tax laws and maximize your savings, it's highly recommended that you work with an experienced expat tax provider, such as MyExpatTaxes. We can help guide you through the process and ensure you take full advantage of available tax benefits best suited to your unique tax situation.
Getting help with your expat tax return
As an expat, being proactive about your US tax obligations is crucial to minimizing your US tax bill and avoiding penalties. Understanding tax treaties and the available exclusions and credits for expats can make a big difference when managing your finances abroad.
To ensure you file your US taxes as beneficially as possible, consult an expert US tax firm such as MyExpatTaxes to navigate the complexities of double taxation and ensure you're in full compliance with US and local tax laws. They can provide the expert guidance you need to handle your tax situation efficiently and maximize your savings.
