As a U.S. citizen, no matter where in the world you live, the IRS requires you to report your income, file your tax return, and pay your taxes.
There are many common misconceptions about Americans living overseas, a common one being that once you move overseas, you are no longer required to file a tax return.
This is simply not true. In fact, to take advantage of the benefits offered to American citizens living overseas, you have to file your U.S. tax return.
So with that in mind, here are seven of my top tips for filing your U.S. tax returns correctly when you live overseas:
- Start early: Engaging in good tax planning before the end of a tax year can help you create big savings on your next tax bill.
- File your U.S. tax return on time: If you are out of the U.S. on April 15th, you have an automatic filing extension to June 15th. However, you may file a regular extension to October 15th, just as if you were in the U.S.
- Correctly file your U.S. tax return: Even if there are no taxes due, especially if you are living overseas, you still need to file a return. This is a great way to keep an on-going record of your filing compliance and keep the IRS from seeking to audit you for an unfiled year.
- Report all income received, U.S. and foreign: Remember, Americans are taxed on worldwide income, not just what is earned in the U.S. This includes dividends, interest, capital gains, alimony, pensions, annuities, and Social Security, along with business and rental incomes.
- Defer, reduce, and eliminate tax where possible: Be aware of, and make use of the top foreign tax benefits available to Americans overseas…they can save you money. These include the Foreign Earned Income Exclusion, Foreign Housing Allowance/Deduction, and the Foreign Tax Credit (I go into more detail about these in my book Expat Taxes Made Easy). If you have business or rental income, be sure to utilize those expenses as well.
- Include required disclosure reporting: Additional reporting forms need to be included in your filing regarding your foreign assets and financial activities, such as: owning a foreign corporation, trust, or partnership, foreign financial business, and foreign investments. Disclosure filings rarely result in additional tax due and for each form you get right, you avoid a draconian IRS penalty later. No one wants to pay $10,000 just because they didn’t file a form.
- Don’t forget an FBAR filing: This Treasury form (FinCEN 114) is filed separately from your annual U.S. tax return and is required if you have foreign bank accounts that collectively reach $10,000 in value at any point during the year. Get used to filing it at the same time as your tax return, because starting with the 2016 filing year, its due date will be moved up from June 30th to April 15th.
After 30 years as a tax professional, I can tell you with confidence that it’s easier (and less costly) to stay out of trouble with the IRS than to get out of trouble once it’s started.
That’s why I wrote Expat Taxes Made Easy: The Complete Guide to U.S. and Foreign Taxes for the American Overseas. This book will help you understand where and how you can save money on taxes, how to stay out of trouble with the IRS, and how you can free up the finances you need to really enjoy your life overseas.
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