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Expat Tax Basics: Income Exclusions for Foreign Incomes

September 20, 2012

If you are an American living in another country for a year or more, you can enjoy up to $95,100 exclusion in your income tax returns for that year. Furthermore, if you are married, filing jointly and your spouse is earning an income while living abroad, you can exclude an additional of $95,100 from the income tax of your spouse. If you total these exemptions, you can basically exclude $190,200 from your taxable income, which by most standards,  is a considerable amount of money.

However, these exclusions can only be claimed by filing a tax return and are not automatic by any means.  If you fail to file your Form 1040 for the applicable year (as well as the appropriate forms claiming this exclusion) you could risk losing the opportunity for the entire deduction.

Aside from these exemptions, you can also claim an additional exclusion or deduction for your foreign housing expenses exceeding a standard amount established by the Federal Government

Income, from the IRS’s point of view in this case, is defined as the money paid to you from the services you have provided. It does not cover rental income, bonuses, interests, dividends or various sources of revenue that is not directly paid for services you render.

Expat Tax Basics: Overseas Tax Credits

Are you paying for foreign taxes which are not excluded from your U.S. income tax returns? This is a likely scenario for most expats that can easily be resolved by hiring the services of foreign tax specialists. Your foreign tax specialist can go through the relevant procedures of having your foreign taxes fully or partially excluded from your U.S. income tax.

U.S. Tax Treaties

More than 60 countries have Tax Treaties with the United States. Tax Treaties in itself are intricate, complicated and loaded with the preverbal small print. However, make no mistake; Tax Treats are advantageous to you as an American tax payer. These treaties do away with the need for you or any U.S. tax payer living abroad to pay for taxes in the U.S. and in the pertinent country at the same time through reciprocated foreign tax credits. In short, Tax treaties are designed to protect citizens by reducing or eliminating double taxation of your income by both countries via reciprocal foreign tax credits. Tax treaties between countries are generally not the same and the tax issues can vary greatly between various countries.

A Note about filing on time

The IRS has 3 years to investigate your foreign tax returns from the date of filing. Once that duration ends, the IRS no longer has the power to claim discrepancies in your tax returns unless it can provide concrete evidence of actual fraud. It is therefore a good idea to file your income tax return while you are out of the country even when you have no taxes to pay simply start the clock on the statute of limitations for the IRS.

Avoiding Underpayment Penalties on Tax Dues

You should understand even if you get an extension for your filing of your income tax return, the underpayment penalties will still be based on April 15th. Furthermore, even when you pay on April 15th but no payment was made prior to that date you will still incur underpayment penalties. This is because the law requires everyone to make regular payments throughout the year to avoid underpayment penalties.

Knowing these expat tax basics can save you a lot of money and can help you keep track your tax obligations not only to United States but to the country where you currently reside. The simplest thing to do to avoid any tax problems is to file your returns regularly, work directly and work directly and consistently with a foreign tax specialist.

Kathleen M. Egan CPA PLLC has served US citizens living abroad and American Nationals living in the U.S. for more than XX years.  With clients in almost every country around the globe the team at Kathleen M. Egan CPA PLLC is ready to answer any questions you might have.


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