This is a guest post from our friends at TFX, a women-owned tax firm.

When American expats hear that they must file a US tax return while living abroad, they are understandably irritated. This filing obligation also extends to green cardholders. Furthermore, because of the Foreign Account Tax Compliance Act or FATCA, a slew of information-sharing treaties with various governments, and artificial intelligence (AI), the IRS is becoming increasingly adept at determining which expats ought to file and what they have to report.

When expats find they still need to file US taxes while living abroad, they typically have to pick between doing it themselves or hiring an expat-specific CPA company. Even though doing taxes as an expat is often more complicated than filing taxes in the United States, many expats prefer to make their own US tax returns. Doing taxes by yourself can be risky as the slightest miscalculation can have some very dire consequences. With that being said, here are some of the most common blunders expats make when filing taxes:

1. Simply copying the previous year’s return

Many expats hire an expat specialty firm once and afterward, use that as a blueprint to repeat the process the following year. The trouble with this strategy is that tax regulations in the United States vary year to year, and they do so in small ways. For example, during the previous few years, tax bracket levels and the Standard Deduction and Foreign Earned Income Exclusion limits have also increased a little each year. 

In the meantime, the FBAR filing deadline was altered in 2017. Of course, the Trump Tax Reform Bill has also implemented significant changes, and depending on each expat’s unique circumstances, there may be measures that may be taken to prepare for the changes. As a result, thinking that US tax rules don’t change from year to year might be an expensive mistake.

2. Reporting only income that comes from the United States

In some ways, it would make sense that the US would only compel American expats to disclose income earned in the United States. However, the United States compels expats to declare their worldwide income and assets, irrespective of whether such money is already subject to taxation in another country. The IRS now has access to expats’ overseas assets and income thanks to FATCA and other bilateral foreign information sharing accords, so they already know what most expats make and own. 

3. Erroneous claim for the Foreign Earned Income Exclusion

Many expats use Form 2555 to obtain the Foreign Earned Income Exclusion, which exempts the first $100,000 of their earnings from US taxation (the actual sum varies every year). Expats who file their tax returns, on the other hand, frequently make the following blunders while claiming the Foreign Earned Income Exclusion:

  • For them, the Foreign Earned Income Exclusion might not be the best solution. The Foreign Tax Credit, for example, could be a better option.
  • Expats are frequently unsure of which kinds of income count and which do not.
  • Expats sometimes make mistakes in their proof of living abroad, either by computing their days spent in or outside the United States erroneously or failing to provide adequate evidence to meet the Bona Fide Residence Test. Both of these mistakes can result in a denial of a claim for the Foreign Earned Income Exclusion, leaving an expat vulnerable to double taxation.

 4. Incorrect filing status

Expats married to a foreign spouse must carefully consider if they should file their US tax return as married filing jointly or separately. Depending on the conditions, either one can be more favorable. If an expat’s foreign spouse does not work, for example, filing jointly may enable the expat to claim double the Standard Deduction and Foreign Earned Income Exclusion. However, if the foreign spouse earns more or has more overseas investments, filing jointly will bring all of their earnings, including future ones, into US tax liabilities.

 5. Neglecting items on an FBAR

Expats with more than $10,000 in overseas bank and investment accounts are obliged to file a Foreign Bank Account Report, or FBAR, at any point during the tax year. However, determining which are eligible is tricky. Accounts over which an expat has signatory authority or any level of control, such as business accounts, for example, are eligible, even if they are not in the expat’s name. Similarly, every account from which an expat profit in any way counts, including those held in a trust’s name.

6. Not reporting rental income on your US Tax Return

All rental income, whether foreign and domestic, must be reported to the IRS. Many property-related expenses, on the other hand, can be used to mitigate expatriate tax liability. Repairs to your home can be deducted right away, while renovations take a little longer. How do you tell the difference between the two? Repairs return the property to its best position, whereas enhancements raise its worth or extend its life.

You’ll want to keep track of spending for both maintenance and upgrades to your rental property, even if they vary. Repairs are deductible, and improvements will be taken into account when calculating capital gains or losses on your expat taxes if you sell your home.

7. Expats do not use tax preparation service

Expat tax filing is complicated enough as it is. Therefore we strongly advise expats with anything but the simplest of situations to seek the help of a professional expat specialized firm like TFX. Seeking the assistance of experts will not only help make sure your taxes are filed correctly but also guarantee you won’t incur any penalties.

Conclusion

So many of us love to travel and spend time abroad. And as real estate investors that want to achieve financial independence and live life as an expat, it will be incredibly important to understand the tax ramifications of doing this.

 

TFX is a women-owned tax firm that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we've handled it all for over 25 years.