When it comes to filing an expat tax return as an American living in Japan, you’re probably wondering how you can save the most money on your taxes. Because expats must file US taxes and are often subject to taxes in their host country, there is often a concern of double taxation. Fortunately, the IRS offers certain credits, deductions and exclusions that help Americans abroad save big when it comes to their expat taxes – read on for details!
- Take Advantage of the Foreign Earned Income Exclusion
Many US expats find that the Foreign Earned Income Exclusion (FEIE) is a great way to save big. Using the FEIE means you can exclude the first $101,300 of foreign earned income from your 2016 expatriate taxes (and $102,100 from 2017 taxes). In order to use the FEIE, you must qualify using one of the following tests:
- Physical Presence Test – This test requires that you live abroad for 330 out of a 365-day period.
- Bona Fide Residence Test – This test requires that you live abroad for a full calendar year. You must also have no intention of returning to the US to live for the foreseeable future, and show you’ve established residency in the foreign country.
- Use the Foreign Tax Credit
The Foreign Tax Credit (FTC) is a dollar-for-dollar reduction of your US tax liability on foreign earned income. While you’re not able to take the FTC on income already excluded with the FEIE, you can either use it in place of the FEIE or take it on any income above the FEIE exclusion limit. Considering the FTC? You will need to meet the following criteria:
- Must have a foreign tax liability paid or incurred.
- Tax must be assessed on income.
- Tax must be imposed on you as an individual.
- Tax must have originated legally in a foreign country.
Also, if your FTC is larger than your tax liability for the year, you’ll be able to carry it back a year or forward for the next ten years! Essentially, you could use the excess to gain a refund from the year prior, or you could use it to offset future years’ tax liability.
- Consider the Foreign Housing Exclusion
The Foreign Housing Exclusion can be used alongside the FEIE to reduce your income by using housing expenses you’ve paid to increase your FEIE for the year while lowering your income. The main goal of this is to offset the higher costs of living outside the US. To qualify for this exclusion, you’ll need to:
- Qualify for and claim the FEIE.
- Have qualifying foreign housing expenses (such as rent, certain utilities, insurance, furniture rental and more).
- Have paid your housing expenses from employer-provided funds, which can be designated as housing funds or part of your regular salary.
- Have housing expenses exceeding the base amount specific to your location (base amount is currently 16% of the FEIE).
Now that you’re armed with the ways to save the most money on your expat taxes, it’s time to think about getting started. An important aspect of saving big on taxes is filing in a timely manner – especially if you will owe anything to the IRS. This is because any taxes owed are actually due on Tax Day (which was April 18th this year), and interest accrues until paid. While the expat tax deadline falls on June 15th, if you think you may owe anything this year, getting started now can help you save as much as possible. Here’s a helpful list of documents you’ll need in order to begin preparing your expat tax return.
This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat taxes for Americans living abroad. Greenback offers straightforward pricing, a simple, hassle-free process, and CPAs and IRS Enrolled Agents who have extensive experience in the field of expat tax preparation. For more information about FBAR, expat taxes or Greenback, please visit www.greenbacktaxservices.com.