The Most Common Expat Tax Deductions

Taxes aren’t exactly most people’s cup of tea. Apart from the tedious task of filing your taxes, paying more taxes than what’s necessary makes it more frustrating, especially if you don’t know how to decrease your taxes. As such, you must know how to leverage your tax benefits, particularly your expat tax deductions.

Tax deductions are a great way to reduce your taxes, allowing you to enjoy more of your hard-earned income. However, many people don’t know where to look or how to maximize them. If you don’t know how tax deductions for expats work, here are a few things to help you understand how they can benefit you.

Tax Deduction vs. Tax Credit

A tax credit directly reduces the amount of tax you owe by a dollar-for-dollar reduction on your income tax. For example, qualifying for an American Opportunity Tax Credit entitles you to up to $2,500 in tax credit, reducing your tax bill by the same amount. You can refund the balance of your tax credit or opt for a non-refundable tax credit.

A tax deduction, on the other hand, reduces your taxable income. Tax deductions use your marginal tax bracket to compute how much tax liability is reduced. This means the amount of tax deductions you’ll receive highly depends on your tax rate.

For example, if you opt for the tuition and fees deduction, your taxable income can decrease by up to $4,000. Those in the 22% tax bracket can save up to $880 from the reduction in taxes owed. Note that your eligibility to claim corresponding deductions will depend on your filing status and household income.

Standard vs. Itemized Deductions

When you file your tax return, you usually have a choice about whether to itemize deductions or to take the standard deduction. Each has its benefits, and your choice can significantly impact your tax liability. Here’s a detailed comparison to help you decide which option is best for you.

Standard Deductions

A standard deduction is a fixed dollar amount that the IRS uses to lower your taxable income. The standard deduction amount you’re eligible for depends on your filing status.

For the 2024 tax year, the standard deduction amounts have increased to the following:

• Single or married filing separately: $14,600
• Married filing jointly or qualifying widow(er): $29,200
• Head of household: $21,900

Once you turn 65 or older, these amounts can increase by $1,650 for singles or heads of households and $1,300 for married individuals or qualifying widows (er)s.

Standard tax deductions can save you money and time from going through piles of records to check which expenses are qualified for a deduction. On top of this, anyone can claim these deductions without needing a lot of supporting papers since they constitute fixed amounts, making it easy and convenient for most expats to claim tax deductions.

Itemized Deductions

Unlike standard deductions, itemized deductions can vary from taxpayer to taxpayer since the amount will depend on the eligible expenses to reduce your adjusted gross income (AGI). Here, you must keep track of your expenses for easier filing come tax season. Once you’ve prepared a list of all eligible expenses, you can subtract their sum from your taxable income.

Here are some of the qualified expenses for claiming itemized tax deductions:

• Medical and Dental Expenses: Medical expenses exceeding 7.5% of your AGI are deductible on Schedule A. These expenses are deductible in the year paid.
• Taxes: State and local income taxes, as well as real estate taxes for U.S. property, are deductible in the year paid. Most foreign income taxes are either deductible as itemized deductions or can be taken as a tax credit.
• Mortgage Interest: Mortgage interest is deductible on up to two homes with a combined secured acquisition debt of $750,000 ($1,000,000 for debt taken out before December 15, 2017). Points on the purchase or major improvement refinances are also deductible, though they may need to be amortized over the life of the loan.
• Charitable Contributions: Donations to qualified charities are deductible, with substantiation required for gifts of $250 or more. The deduction is generally limited to 50% of AGI.
• Casualty and Theft Losses: These losses are subject to a $100 deduction and a reduction of 10% of AGI per loss. Casualties must be sudden, unexpected, or unusual events.

Miscellaneous Deductions

The Tax Cuts and Jobs Act eliminated the deduction for miscellaneous itemized expenses subject to the 2% of adjusted gross income (AGI) floor. This means that taxpayers can no longer deduct expenses such as unreimbursed employee expenses, tax preparation fees, and certain other miscellaneous expenses. These may still be deductible on state income tax returns depending on the state. You may still deduct gambling losses up to the amount of your gambling winnings.

You can opt for this type of tax deduction if you have more of the qualified expenses to claim, saving you more money in taxes. However, it may entail more time and paperwork as you keep track of applicable expenses and have an itemized record for each of them.

TIP: If you plan on itemizing deductions, consider making charitable donations through appreciated securities instead of cash. This way, you can avoid paying capital gains tax on the appreciation and still receive a deduction for the full market value of the securities.

So, which one should you go for?

To determine which option is best for you, compare the total of your itemized deductions to the standard deduction amount. Generally, you should choose the method with the highest deduction and the lowest tax liability.

Here are four tips to help you decide:

1. Figure your itemized deductions. Add up any deductible expenses that you paid during the year.

If your itemized deductions exceed the standard deduction, you should use this instead of the standard deduction. Many taxpayers choose to itemize deductions based on the amount paid for home mortgage interest and real estate property, which may exceed the standard deduction.

Special rules and limits apply, however, so be sure to request a quote below for additional details.

2. Know your standard deduction. If you choose not to itemize, your standard deduction for the 2024 tax year depends on your filing status. For example, single filers get $14,600, while married filing jointly get $29,200. 

3. Check the exceptions. Some taxpayers don’t qualify for the standard deduction and must itemize. This includes married couples who file separate returns and where one spouse itemizes.

4. File the right forms. To itemize your deductions, use Form 1040 and Schedule A, Itemized Deductions.

Still not sure whether to itemize or take the standard deduction? No problem. Request a free quote below to get started with your tax preparation engagement, and we’ll help you figure out if itemizing deductions is the right choice for you.

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Above-the-Line Tax Deductions for Expats

Above-the-line deductions are specific expenses that reduce your gross income to arrive at your adjusted gross income (AGI). You subtract these deductions from your total income before calculating your AGI, making them distinct from itemized deductions. Itemized deductions, along with the standard deduction (below-the-line deductions), are subtracted from your AGI to determine your taxable income. Above-the-line deductions offer flexibility as they can be claimed even if you take the standard deduction.

Here are some common above-the-line deductions available to taxpayers:

• Educator Expenses

K-12 educators can deduct up to $300 for out-of-pocket classroom expenses. If both spouses are eligible educators and file jointly, they can deduct up to $600. Expenses beyond this limit can be claimed as itemized deductions if you choose to itemize.

• Health Savings Account (HSA) Contributions

Contributions to an HSA are fully deductible if you have a high-deductible health plan. For 2024, the maximum contributions are $4,150 for individual coverage and $8,300 for family coverage. These contributions can lower your AGI and offer tax-free withdrawals for qualified medical expenses.

• Moving Expenses

While moving expenses were previously deductible for many taxpayers, the Tax Cuts and Jobs Act of 2017 limited this deduction to active-duty military personnel moving due to a military order. Qualified expenses include moving household goods and travel to the new location.

TIP: If your reimbursement for moving expenses exceeds your actual costs, you must report the excess as taxable income.

• Self-Employment Deductions

1. Self-Employment Tax: Self-employed individuals can deduct half of their self-employment tax. This deduction accounts for the employer’s portion of Social Security and Medicare taxes.
2. Retirement Contributions: Contributions to SEP IRAs, SIMPLE IRAs, and other qualified retirement plans are deductible. This helps self-employed individuals save for retirement while reducing their taxable income.
3. Health Insurance Premiums: Self-employed individuals can deduct premiums for health, dental, and long-term care insurance for themselves, their spouses, and their dependents. This deduction is limited to the business’s net profit.

• IRA Contributions

Contributions to traditional IRAs are deductible up to $7,000 for 2024, with an additional $1,000 catch-up contribution allowed for those aged 50 or older. The deductibility of these contributions may be subject to income limits if you or your spouse participate in an employer-sponsored retirement plan.

• Tuition and Fees

The tuition and fees deduction allows taxpayers to deduct up to $4,000 in qualified education expenses for themselves, their spouses, or their dependents. The deduction phases out at higher income levels, specifically for single filers with AGI above $80,000 and married couples with AGI above $160,000. Claiming an education-related credit may be better.

• Alimony Paid

Alimony payments are deductible if your divorce or separation agreement was finalized before December 31, 2018. This deduction can significantly reduce your taxable income, but it requires including the recipient’s Social Security number on your tax return​.

• Penalty on Early Withdrawal of Savings

If you incur a penalty for early withdrawal from a savings account, such as a certificate of deposit (CD), the penalty is deductible. This can help offset the financial impact of accessing your savings early.

TIP: If you are self-employed and over 55, consider setting up a defined benefit plan. This allows you to contribute significantly more towards your retirement than other retirement plans and potentially reduce your taxable income by a significant amount​.

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Expat-Specific Tax Deductions and Credits

• Foreign Earned Income Exclusion (FEIE)

This tax deduction is one of the most common for American expats with a tax home and abode outside the U.S. It reduces your payable income tax from some or all of the income you’ve made outside the country. You’ll need to pass the physical presence test or bona fide residence test to verify that you are an expat before claiming this tax deduction.

Read more: The Foreign Tax Credit: An Ultimate Guide for U.S. Expats

• Foreign Housing Exclusion and Deduction

The Foreign Housing Exclusion and Deduction go hand-in-hand with the FEIE tax deduction, which allows you to deduct certain foreign housing expenses from your foreign-earned income. These include rent, utilities, renter or homeowner insurance, property taxes, and furniture rental. This lets you save money from tax deductions by reducing the amount of your taxable foreign-earned income.

• Foreign Tax Credit (FTC)

The FTC provides a dollar-for-dollar reduction in U.S. tax liability for taxes paid to foreign governments. This credit is essential for avoiding double taxation on the same income. It’s particularly useful in countries with higher tax rates than the U.S., and you can carry forward any unused credits to future tax years.

• Child Tax Credit

Expat parents with dependent children who are U.S. citizens or permanent residents may claim the Child Tax Credit. This credit provides up to $2,000 per qualifying child, with up to $1,500 refundable for those who meet the income requirements. This credit helps reduce overall tax liability significantly for families living abroad​. Taxpayers claiming the foreign earned income exclusion are not eligible for the additional child tax credit.

• Tax Treaty Benefits

The U.S. has tax treaties with many countries to prevent double taxation and provide specific benefits such as reduced tax rates on certain types of income like pensions and retirement plans. Applying these treaty benefits can further reduce your U.S. tax liability.

• Social Security Totalization Agreements

These agreements between the U.S. and other countries ensure that expats do not pay Social Security taxes to both countries. Depending on the agreement, you may choose which country’s social security system to contribute to.

Other Most Overlooked Expat Tax Deductions

1. State Sales Taxes

Taxpayers have the option of deducting state and local income taxes as an itemized deduction. But what if you have no state or local income taxes? You can then choose to deduct state sales taxes – you have the option between deducting “actual” sales taxes paid or utilizing the standard sales tax deduction available from published IRS tables. If you purchased a car, boat, or airplane, you can increase the standard sales tax deduction by the “actual” sales tax paid on these big purchase items.

2. Charitable Contributions

It’s not easy to forget donations made to Goodwill, cash donated to your church, etc. However, most taxpayers overlook charitable donations that are made via paycheck deduction, such as to the United Way and more. These are if you are like many taxpayers, you are always looking to uncover tax deductions that will help lower your tax liability. It is a treasure hunt, in essence, to find those buried treasures of overlooked expat tax deductions as well. In addition, miles driven for charity, such as to donate your time at events, etc. are deductible as well at a standard rate.

3. Student Loan Interest

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your income is below qualified thresholds, there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. The student loan interest deduction is claimed as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A.

4. Other State Taxes Paid During The Tax Year

Did you owe taxes on your state income tax return for last year and pay them during the current tax year? If so, you can include that amount in your state taxes paid as part of your itemized deductions.

FAQs About Expat Tax Deductions

1. Can I deduct mortgage interest and real estate taxes paid on my foreign residence?

Yes, you can claim the same deduction for mortgage interest. However, effective with tax year 2018, foreign property/real estate taxes paid are no longer eligible as an itemized deduction. The deductions are taken on Schedule A, assuming the standard deduction is less than the total of your itemized deductions. You may be able to deduct/exclude other foreign housing costs, depending on your situation.

2. What is the tuition and fees deduction?

Students and their parents may be able to deduct qualified college tuition and other related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American Opportunity, Hope, or Lifetime Learning credits.

You cannot claim any of the education credits if you claim a tuition and fees deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse, or your dependent. The parent or the student can claim the credit but not by both. If claimed as a dependent, students cannot claim the credit.

3. I’ve paid tuition to a foreign educational institution. Are these expenses eligible for a deduction or credit?

In general, these expenses will not be deductible or eligible for credit unless they are accrued from an eligible educational institution.

Qualified expenses are amounts paid for tuition, fees, and other related expenses for an eligible student that are required for enrollment or attendance at an eligible educational institution. An eligible educational institution is a school offering higher education beyond high school. It is any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education. If you aren’t sure if your school is an eligible educational institution:

• Ask your school if it is an eligible educational institution
• See if your school is on the U.S. Federal Student Aid Code List

4. Are charitable donations to foreign charities deductible on my U.S. tax return?

In general, these charitable donations will not be deductible on your U.S. tax return. To be deductible, charitable donations need to be made to qualified organizations. A qualified organization is generally one that has received 501(c)(3) status from the IRS. If you are unsure, you can ask any organization whether it is a qualified organization, and most will be able to tell you. Or you can use the tool here to search for qualified organizations.

Tax Deductions are Your Best Friends

Nobody wants to pay more taxes than what’s necessary, and you should not either! However, many still don’t know what can help them save money from their taxes.

Understanding how expat tax deductions work and what you can claim under specific categories is a must. With tax deductions, you can reduce your taxable income, thereby reducing your tax liabilities.

If you’re unsure which tax deductions you can take or which approach to use, Tax Samaritan is here to help. We’ve been providing professional quality tax resolution services to expats since 1997, so we can give you solid advice on how to save the most from your taxes.

Do you need help filing your US expat taxes? Schedule a call using the button below.