If you are a U.S. resident living outside the U.S. and have made over $10,000 in annual income (or just $400 of self employment income), then you are required to file a federal tax return (certain states will also require you to file a state income tax return).
However, the good news for expats is there are a number of tax exemptions (Foreign Tax Credit & Foreign Earned Income Exclusion) that you may able to take advantage of to help save you money on your taxes.
Although saving money on these exemptions is great, we all know filing your taxes can be a bit of a pain. But no matter how you view tax season, this one truth remains. Expat taxes tend to be more complicated than we would all like them to be.
If you are a U.S. expatriate and have international taxes to file, then you definitely want to work with a CPA or accountant that specializes in serving expats. Most CPAs tend to serve whoever walks through the door at their accounting office. Meanwhile, they are often quite ignorant of the complicated international tax laws that they are about to encounter. This is why it is essential for you to work with an accountant for expats because a CPA for expats focuses on staying up to date on all of the international tax laws and issues. It’s their job to stay on top of all the unique and ever changing international tax laws that are faced by Americans overseas each and every tax year.
Not only do they stay abreast of the current tax laws, they also take extra courses that focus directly on international tax law. After we saw how poorly expats were being served, we took the time to become Certified International Tax Accountants. We felt expats were being neglected by accounting services that did not intimately know international tax laws. We wanted to provide expats with the best possible service and experience when dealing with tax related issues for both their personal and business taxes.
So as you can see, not all CPAs are created equal when it comes to serving expats. This is why it is vital for you to do your research before you ever hire an accountant or CPA firm.
1. Expat Experience – Since you are looking to hire an accountant that specializes in expat taxes, be sure to ask how many tax returns they have filed for expats and how long have they been serving expats. It’s also important to know how they keep themselves up to date on international tax laws.
2. Price or Fees – All trustworthy and reputable accounting firms are straightforward about what they charge. Once an accountant understands what your accounting needs are, they should be able to provide you a quote with accurate pricing. Once you receive the quote, be sure to review it and make sure you ask questions about anything you don’t readily understand in the quote. Having done your due diligence, it will be easier to make sure you are comparing apples to apples when reviewing quotes from multiple accounting firms.
3. Communication – Once you become a client, how will communication be handled. What is the best method of communication with your expat CPA? Do they prefer a phone call, text message, or an email? Will a member of their staff be handling the majority of the communication? How long does it typically take for them to respond to your inquiries? The communication style and efficiency of the CPA you are hiring is very important and too often overlooked. Make sure you don’t skip past these communication questions when considering your expat accountant. If you do, you might feel quite disappointed a few months down the road.
4. Years in Business – When considering who should be your accountant, it’s best to go with an established CPA firm that has been in business for a while. You are also going to want to be served by an accounting firm that has employees and is not just a one man or woman operation. With one person operations, their resources and time are very limited and they will struggle to keep up with your questions come tax time when they are lost in a pile of endless tax returns.
5. Reviews – It’s good to know what other clients say about the firm. In today’s world some clients will actually take the time to leave online reviews on websites like Facebook, Google, Bing, Yahoo etc… When reading these reviews, be sure to read between the lines. Some people wake up on the wrong side of the bed and can just never be pleased so they chose to retaliate with a bad review. This happens to nearly every business online these days. With that being said, we suggest researching accountants that have a good amount of reviews so you can get a good feel of what the overall consensus is among clients of the accounting firm. You should look for accountants with at least 20 reviews and they should also have at least a 4 out of 5 star review rating.
6. Audit Protection – Tax audits happen to families, individuals and businesses. If an expat audit occurs, you want to know that you are in good hands. Be sure to ask your prospective accountant if they have done any special training to negotiate with the IRS on your behalf. Also, be sure to ask them what their process is in case you get audited.
• Bonafide resident test
• Contractors working in combat zones
• Common IRS tax forms specific to expats (Forms 1116, 2555, 2555 EZ, 5472 & 8865)
• Digital nomads
• Coronavirus and it’s impact on expats
• Days spent in the U.S. vs. days spent abroad
• Expat tax preparation
• Expat business owners and entrepreneurs
• Foreign business deductions
• Foreign corporations and partnerships
• Foreign Earned Income Exclusion
• Foreign Tax Credit
• Individual Taxpayer Identification Number
• International students
• Passport revocation
• Physical Presence Test
• Problem resolution
• Reinstatement of revoked passport
• Resident aliens
• Retiring abroad
• Tax return filing procedures and extensions for expats
1. Expats can Amend Their Previous U.S. Tax Returns – When you file your taxes, mistakes can happen. We are all human and the IRS understands this. So, if you failed to claim some income from your salary, bank interest, tips, rental income, bank dividends etc… You are always better off filing an amended return before the IRS reaches out to you questioning your return.
2. Most Expats Normally do not Owe any U.S. Taxes – For expats, the IRS has a few tax credits and exclusions that an expat might qualify for. These include the Foreign Housing Exclusion, Foreign Tax Credit and the Foreign Earned Income Credit. One of our favorites is the Foreign Tax Credit because it helps prevent you from getting double taxed on your income. But in order to get this tax credit, you must be sure to file your taxes.
3. You Must Prove Which Country You are a Resident of – In order to qualify for expat related tax deductions, credits and benefits, you must pass the Physical Presence Test. With this test, you must have been present in an overseas country for at least 300 days over a given 365-day period. The 330 days do not need to be consecutive. The Physical Presence Test applies to U.S. resident aliens as well as U.S. residents. For a day to actually count (towards the 330 days required to pass the test), you must be in a foreign country for 24 consecutive hours which begin and end at midnight.
4. Important 2021 Federal Tax Dates and Deadlines
• June 15, 2021 – U.S. Expats must file their federal taxes by 6/15/21.
• October 15, 2021 – If you would like to extend your filing deadline beyond 6/15/21, you can do so by filing for an extension. Once you have filed for an extension, the filing date for your taxes will be pushed to 10/15/21. If you do file for an extension, it is important to know that if you owe the IRS money, filing an extension does not grant an extension of time to pay your owed tax. So, you may want to start paying Uncle Sam sooner than later if you expect to owe money on your federal taxes.
• December 15, 2021 – If you are an American living overseas, you can draft a letter to the IRS that requests to extend your tax deadline to 12/15/2021. If you write and submit such a letter, there is no guarantee that the IRS will grant this extension. Extensions of this nature are not automatic and are handled on a case by case basis. You really do not want to go this route unless you absolutely have no other choice.
We hope you have found these 4 tax tips helpful and if you have any tax questions, be sure to call us for all your international related tax needs.