Have you moved — or are you planning to move — to a foreign country? Americans living abroad as expats face a variety of unique challenges, and their income tax returns can be one of them. What new situations might you face when you live across U.S. borders? Here are five things you'll need to address.
1. Reporting All Income
The United States tax system doesn't care where Americans physically earned their income. It still expects you to report all of it as potential taxable income. So if you have a job, gig, rental, or business in your new country of residence, keep track of it and include it. And you may need to determine the exchange rate to turn it into reportable dollars.
2. Avoiding Double Taxes
Because many expats who earn money elsewhere (such as wages for teaching English to students) are subject to taxes from the local country, they are at risk of paying taxes to the U.S. on the same income. You generally have two ways to avoid this: the Foreign Earned Income Exclusion and the Foreign Tax Credit. These two deductions attack the tax problem from two angles, so you'll need a strategy to get the most value from them.
3. Filing Financial Documents
Do you have money in any foreign accounts? If so, you may have to file documents declaring their value if over a certain threshold. FinCen Form 114 (known as FBAR) and Form 8938 are how you do this, depending on how much money you have in these accounts. An experienced tax preparer can help you complete these.
4. Filing State Taxes
While most expats aren't subject to state income tax rules (as they no longer live in a state), some still do. This includes the year you move into or out of the U.S, anyone who maintains a business or rental unit in the U.S, and a snowbird who spends part of their year in both countries.
5. Handling Health Insurance Mandates
The rules requiring Americans to have health insurance may or may not apply to expats. Generally, this is determined by their residence status, how much time they spend in the U.S. annually, and their income. To comply with the rules regarding insurance, you may need to determine your eligibility and complete IRS forms to report it.
Do you need help with any of these? If so, start by meeting with a local tax service today. If you still live in the U.S, locate one within your current home state. If you've already moved on to greener shores, look for an accountant or preparer who is able to prepare taxes across the country. By getting the help you need now, you can foresee any problems and ensure your transition to expat status is smooth.