It can be stressful to move abroad. Right? That’s why Americans should consider many factors when moving abroad, including taxes. The tax implications of moving abroad for expats are something that many are aware of.
Many people are afraid of double taxes, but expat life can offer significant tax savings.
Here are the top 5 tax tips for Americans living abroad.
1. Understand U.S. Filing Rules for Expats
The United States has a unique tax system. All Americans must report their worldwide income each year regardless of whether they reside abroad.
Americans who live abroad must file annual U.S. tax returns detailing both their U.S. income and international earnings. This applies regardless of whether they are filing or paying foreign taxes or if they reside in a country with a tax treaty. If you are living in Japan, you can take help from expat tax CPA in Japan. They will assist you to reduce the overburden of taxes.
When filing taxes from abroad, Americans get additional time because they are required to file taxes from abroad first which is an automatic extension to the 15th of June.
2. Catch up if You’re Behind
If you were already living in another country and didn’t know you needed to file a U.S. tax return, you can avoid paying penalties by catching up before the IRS sends you a letter.
There’s an amnesty program for Americans in other countries who didn’t realize they needed to file. This program lets them get caught up without any penalties as they can catch up before the time the IRS mails them letters referred to as “Streamlined Process”.
3. Understand US expat tax treatment of Foreign Insurance
Non-US registered insurance products will not be considered insurance according to US tax rules. These products are not eligible for tax benefits. The US taxpayer will not be able to use tax referrals to make this long-term investment.
The IRS views foreign insurance policies as foreign investment accounts. Additionally, it is possible that the foreign insurance policy will be a part of a trust which includes PFIC. This means taxpayers would have to deal with tax requirements that could harm their returns.
4. To reduce taxes, use the foreign-earned income exclusion
Foreign earned income exclusion allows you to exclude as much as $100,800 from US taxation. Only one thing is required: you must pass one of the two residency tests. The Physical Presence test will require you to be physically present in a foreign country for 330 days.
The Bona Fide Residence test can only be used by those who have been living abroad for one year and are well-rooted in the new country.
5.Keep a US address and bank account.
While it is important to be aware of the state taxes, expats should consider having a US bank account and an address while abroad. Having a US bank account and address can help make it easier to live abroad.
Banks sometimes lose the ability to process social insurance deposits for several months at a stretch. If they are dependent on these payments, it can make expat retirees’ lives difficult.
Expats can make it easier to live abroad by having a US address and bank account.
Final thought
The most important tax tips for Americans living abroad require additional forms, reporting requirements, and currency conversions. It also requires understanding the overlap in tax systems between the two countries.
