Four Ways To Reduce Your US Taxes As An Expat

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In this article, we review four ways you can reduce your US taxes as an Expat. You should seek suitably qualified advice about your own personal situation before relying on these exclusions and credits.

The Foreign Earned Income Exclusion (FEIE) allows expats to reduce their US tax bill. This exclusion allows you to exclude the first $102,100 of foreign earned income from your 2017 tax return. To take advantage of the FEIE, you must qualify under one of two residency tests:

  • Physical Presence Test: You must live abroad for 330 out of a 365-day period. This does not have to be a calendar year.
  • Bona Fide Residence Test: You must live outside the US for a full calendar year, with no intention of returning to the US to live in the foreseeable future. You must also show that you’ve established a residence in your country of residence.

You can also reduce the amount due on your US taxes through the Foreign Tax Credit (FTC). This provides a dollar-for-dollar reduction of your US tax liability on your foreign earned income for the tax you have paid in your country of residence.

Remember: You can’t use the FTC on income you’ve already excluded with the FEIE.

You can take advantage of this credit on income above the FEIE limit or alternatively, in place of the FEIE entirely.

You should discuss your options with an expat tax professional to ensure you choose the best option(s) for your tax situation.

To use the FTC, you must have:

  • Foreign tax liability that was paid or incurred on the income in question
    • The foreign tax must be assessed on income
    • The foreign tax must be imposed on you as an individual
    • The foreign tax must be due by you under the tax laws in a foreign country.

Another benefit of the FTC is that you can carry the credit back or forward if the credit is larger than your US tax liability for the year.

This means that you may carry the credit back to the preceding tax year to gain a refund, or you may carry it forward for up to ten years to offset future tax years’ liability.

The Foreign Housing Exclusion helps to offset the fact that the cost of living overseas is often higher than those in the US.

The Foreign Housing Exclusion works in conjunction with the FEIE, reducing your taxable income by using housing expenses you’ve paid to increase your FEIE for the year.

To qualify to claim the Foreign Housing Exclusion you must:

  • Qualify for and claim the FEIE
  • Have qualifying foreign housing expenses (rent, certain utilities, insurance, furniture rental, etc)
  • Have paid your housing expenses from employer-provided funds (can be designated funds paid by your employer or paid from your regular salary)
  • Have housing expenses that exceed the base amount specific to your location (base amount is currently 16% of the FEIE).

You can claim your expenditure in excess of the base amount, up to the maximum ceiling (usually 30% of the FEIE but certain cities have individual limits. For 2017, the ceiling for Singapore was $75,900).

In addition to the three ways above that help you save on your expatriate taxes, filing as close to the first deadline as possible (which was 18 April this year) can also reduce your bill, as any tax owed is technically due on 18 April and begins accruing interest from that day forward.

This article is based on AAM’s understanding of current US tax law and practice, which is subject to change at any time.

Sources:
https://www.irs.gov/pub/irs-prior/p54–2017.pdf
https://www.irs.gov/pub/irs-pdf/i2555.pdf

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd

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