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Are You An American Living Abroad? Here Are The Essential Tax Facts To Consider

Are you an American living abroad? Tax season can be a confusing time, especially when you’re navigating the complexities of filing from another country. This guide will break down everything you need to know about filing US taxes as an expat, from claiming valuable tax credits to understanding state tax implications.

Myth Busters: You Still Need to File

First things first: Just because you’ve moved overseas doesn’t mean you’re exempt from filing US taxes. The IRS requires nearly all US citizens to file a federal tax return every year, regardless of their location. This means reporting your worldwide income, including wages, salaries, interest, dividends, rental income, and more.

The Good News: Credits Can Save You Money

The good news is, several tax credits can significantly reduce or even eliminate your tax liability. These include:

  • Foreign Earned Income Exclusion: This credit allows you to exclude a portion of your earned income from foreign sources from US taxation. To qualify, you need to pass either the Physical Presence Test (being physically present in your foreign country for at least 330 out of 365 days) or the Bona Fide Residence Test (living outside the US for at least a full year with no intention of returning).
  • Foreign Tax Credit: Paid taxes to a foreign government? You might be eligible for a credit to avoid double taxation.

Understanding the Tests: Qualifying for the Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is a valuable benefit, but claiming it requires meeting specific criteria. Here’s a closer look at the two qualifying tests:

  • Physical Presence Test: This is a straightforward test. You simply need to be physically present in your foreign country for at least 330 days out of a 365-day period.
  • Bona Fide Residence Test: This test is more stringent. It requires living outside the US for a full calendar year with no intention of returning. This is designed to prevent temporary workers from claiming the credit.

Important Note: Since the 330-day period might span two calendar years, the IRS allows you to file an extension (Form 2350) to give you until October 15th to meet the qualifying period. The maximum exclusion amount is also subject to change annually.

Beyond Federal Taxes: State Tax Considerations

Even after filing your federal return, don’t forget about potential state taxes. Many states continue to tax residents who move away unless they’ve “permanently severed ties” with the state. This means you might still need to file a state tax return even if you live abroad.

Here are some factors that might trigger a state tax filing requirement:

  • Maintaining a valid driver’s license or other state ID
  • Having a spouse or child residing in the state
  • Remaining registered to vote in the state
  • Holding an open bank account in the state

California, New Mexico, South Carolina, and Virginia are particularly notorious for this, so be sure to research your specific state’s regulations.

The Perks of Expat Life: Social Security Benefits

While taxes are a reality of expat life, there are also benefits. For example, you can continue to receive Social Security benefits even if you retire abroad. There are only a few exceptions, including Cuba, North Korea, and a handful of other countries. Even if you reside in one of these excluded countries, you can still file for back payments once you move to a qualifying nation.

Seeking Professional Help: Making Tax Season Smoother

The complexities of expat tax filing can be overwhelming. Don’t hesitate to seek professional help from a tax advisor or accountant experienced in handling expat tax situations. They can ensure you claim all available credits and deductions, avoid penalties, and navigate the entire process smoothly.

Remember, the internet makes it easy to collaborate with a professional, regardless of your location. Having an expert handle your taxes can give you peace of mind and save you valuable time and money.

By understanding your tax obligations and taking advantage of available benefits, you can make tax season as an expat a less stressful experience.

JS Morlu LLC is a top-tier accounting firm based in Woodbridge, Virginia, with a team of highly experienced and qualified CPAs and business advisors. We are dedicated to providing comprehensive accounting, tax, and business advisory services to clients throughout the Washington, D.C. Metro Area and the surrounding regions. With over a decade of experience, we have cultivated a deep understanding of our clients’ needs and aspirations. We recognize that our clients seek more than just value-added accounting services; they seek a trusted partner who can guide them towards achieving their business goals and personal financial well-being.
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