Common Tax Mistakes U.S. Expats Should Avoid

For many people, living in another country is an opportunity of a lifetime. Reasons why people would opt to live in another country include a change for the better, new opportunities and lifestyles, and new work or promotion.

There are a lot of benefits to moving abroad; however, it also presents new sets of challenges, like following the adoptive country’s laws and policies on filing taxes and applying for certain services.

U.S. expat taxes can be confusing and anxiety-inducing. Even if you don’t live in the States anymore, you are still obligated to file your taxes with the Internal Revenue Service (IRS) while filing taxes in your adoptive country. Failure to do so could result in a range of consequences in the form of fines or criminal charges and revocation of your U.S. passport.

Below are just some of the tax mistakes U.S. expats commit:

Mistake #1: Not filing a tax return.

As a U.S. expat, your worldwide income is subject to U.S. income tax. Worldwide income includes your wages, salary, interest, dividends, rental income, capital gains, and retirement distributions—all income generated during the tax year.

According to U.S. laws, expats are still required to file a tax return to report all forms of income to the IRS, even if these are not taxable in their resident country.

Mistake #2: Failure to divulge assets.

U.S. expats who have foreign bank accounts with an aggregate value of $10,000 or higher at any time during the year are required to fill out a Report of Foreign Bank and Financial Accounts (FBAR) form.

This discloses foreign assets, such as a savings account in a foreign bank, joint accounts with spouses, relatives or non-relatives, and any other account where the taxpayer has signature or ownership authority over.

Minors who have one or more bank accounts that exceed the filing threshold are also required to file. Failure to report this could lead to penalties up to $10,000 for non-willful failure, while willful failure could go as high as $100,000 or 50% of their account balances. Ensure that all assets are reported to avoid these penalties.

Mistake #3: Not filing self-employment tax.

If you are self-employed while living abroad but earn less than $400, you don’t have to file a tax return. Only when you make more than $400 will you need to file a tax return and pay taxes as an American abroad.

In the FAQs: I am self-employed, and all of my income is excluded under the FEIE. Why does my return show a balance due?

Mistake #4: Not claiming the correct filing status.

A U.S. expat’s filing status is used to determine their filing requirements, deductions, credits, and tax rates. The brackets are as follows:

• Single
• Married Filing Jointly
• Married Filing Separately
• Head of Household
• Qualified Widower

Single filers have a lower standard deduction and subject to higher tax rate generally than if filing jointly or head of household. If you are Married Filing Jointly, you and your U.S. citizen spouse combine your income and deductions into one tax return. This status allows for a higher standard deduction and lower effective tax rate.

Married Filing Separately is an option for taxpayers and required if your spouse is not a U.S. citizen (Note: you may be able to make an election to treat your spouse as a resident alien to file a joint return). You will file your tax return separately from them, and your spouse is not required to file a U.S. tax return, nor is his/her income required to be reported on your tax return if not a U.S. citizen or resident. You are Head of Household if you are not married, pay more than half of the total household expenses, and have a qualifying U.S. citizen dependent (Note: those married to a non-resident alien spouse may qualify to file head of household if they have a qualifying dependent).

Lastly, you are a Qualified Widower for two years following your spouse’s year of death and have a dependent U.S. citizen child. Make sure to file under your correct status to qualify for the correct deduction and tax rates.

Mistake #5: Not claiming allowable deductions and credits.

There are various types of deductions and credits that can help lower your U.S. taxes. A credit is a dollar-for-dollar tax reduction, while a deduction is a reduction in your taxable income. A tax credit will be a greater benefit for you than a tax deduction.

Tax deductions can include housing expenses paid from employer-provided funds and the like. Make sure to save your receipts and other proof when filing.

Count Twice, File Once

Living abroad can be a dream come true, so long as you still do your obligations as a U.S. citizen. When it comes to filing your taxes, save yourself from the hassle of repetitive, tedious work and make sure to avoid committing these tax mistakes.

To make life easier, hire the services of a tax firm specializing in providing solutions for U.S. expats. Tax Samaritan has been helping expats with their taxes since 1997. We understand all the intricacies of U.S. tax laws and offer solutions for a hassle- and worry-free tax filing, even if you’re not living in America. Visit our page for more details about our expat tax services.