The Foreign Earned Income Exclusion and Foreign Tax Credit benefits usually alleviates the need for most expats to pay US expat taxes. However, expats still need to file taxes annually if their gross worldwide income is over the filing threshold, which means that even if taxes are not owed to the IRS, one may still need to file. The US tax code can be complex to understand and the tax professionals at Orlando, Florida based CPA Accounting & Tax Services outlines the top 6 things for an expat to consider when filing their US taxes:
1. What is the tax rate for expats?
Self-employed expats need to know that the FEIE only excludes income from income tax. They must still pay self-employment tax on the net earnings. The self-employment tax is 15.3% for the first $137,700 of income, plus 2.9% on net income in excess of $137,700.
2. When must expats file taxes?
Expats must file a United States Federal Tax Return if they have income exceeding their filing threshold (this varies by filing status, receive certain credits or if other special circumstances apply. Examples of income including wages and/or salary from United States and non-United States sources, interest, rental income and dividends.
3. What is the Foreign Earned Income Exclusion (FEIE)?
With the Foreign Earned Income Exclusion you may be able to exclude up to $107,600 for the 2020 tax year and up to $108,700 for the 2021 tax year. This exclusion is the most common way for expats to eliminate or reduce their United States tax liabilities. It is important to note that Foreign Earned Income Exclusion is not automatic. You must qualify for it by filing Internal Revenue Service (IRS) Form 2555 or 2555-EZ. Once you choose to use the FEIE, it will remain in effect and you must include it on your tax return each year thereafter. If you no longer wish to use it, you cannot claim the exclusion for the next five tax years without the approval of the IRS.
4. What are the residency requirements to qualify for the Foreign Earned Income Exclusion?
In order to qualify for the Foreign Earned Income Exclusion, you must pass The Physical Presence Test. The test requires proof that you were physically present inside a foreign country for 330 of any 365 day period. It is important to track any travel days carefully to ensure you are physically present inside a foreign country for the minimum of 330 days.
5. When must a Foreign Bank Account Report (FBAR) be filed?
If your foreign bank account balances exceeds the $10,000 reporting threshold, FinCEN Form 114 must be filed.
6. How are an expats Social Security Benefits affected?
When you retire abroad, you can still collect your social security benefits in almost every country around the world with few exceptions. You must report your Social Security benefits as income on your US expatriate tax return. Generally, if you have other income, your benefits will be taxed. But if they are, only 85% of your benefits can be considered taxable income.
We can help navigate you through the complexities of International Tax Laws and filing for expats. Contact the professionals at CPA Accounting & Tax Services to help guide you through tax season and beyond. We specialize in Business Accounting Services, Individual Tax Services, Tax Preparation, International Tax Services, Tax Planning and Tax Resolution Services. We have offices in Orlando, Florida and service clients worldwide. Find out how we can serve all of your accounting needs by contacting us today: www.cpaaccounting.biz