Moving abroad can be complicated enough, but it becomes even more challenging as tax season approaches.
The process of complying with foreign income tax requirements for USA citizens isn’t as straightforward as most would like it to be, and you cannot simply rely on the same methods that you use at home.
Expats, however, are often caught by surprise and end up either underpaying, overpaying, or not paying the IRS at all. To avoid any legal problems in the long run, it’s absolutely essential that you follow the tax code to the last letter.
This is easier said than done, that is why, in this guide, we’re going to share with you five common tax filing mistakes that expats often make:
Tax Mistake 1: Financial and tax reporting errors
Filing your US expat taxes can be quite confusing, especially if you aren’t familiar with its ins and outs.
You can easily drown in the sea of requirements and provisions if, besides being a US expat, you own businesses and properties abroad, hold foreign bank accounts, have dependents, and many more.
These special situations have implications on the amount of your tax dues, requiring you to adjust your computation correctly.
Unfortunately, if you don’t know how to do that, you can commit financial and tax reporting errors that might lead to hefty fines or you repeating your filling process.
That is why, if you want to avoid those errors, one of the best things you can do as a US expat is to work with third-party consultancy firms like Expat Tax Professionals. Expat Tax Professionals has a team of licensed CPAs with years of experience guiding US expats on how to file their taxes accurately.
These specialists can help you determine the amount you need to pay, relevant information to declare, and the exclusions and exemptions you may qualify for, among many others.
This way, you can indicate the right figures and information in your expat tax reports.
Tax Mistake 2: Having no clue about tax treaties
The good news is that some U.S. expats working abroad aren’t even required to pay taxes back at home. This is because most countries allied with America have bilateral treaties that prevent citizens from paying taxes twice (once to their home country and another to the host country).
You should know prior to filing your U.S. tax return just exactly how much you owe to avoid double taxation. Once you’ve already paid taxes to the foreign country, it’s very unlikely that you’re required to pay the full amount to the IRS as well.
Regardless of how much you owe, always remember that you still have to file a tax return to the States, even if that amount happens to be zero.
Tax Mistake 3: Forgetting your tax obligations as an expat
It’s not just your regular income that has to be declared when you’re working abroad—there are a bunch of other tax obligations that you have to comply with.
For example, if you own foreign assets that exceed $10,000, then you are required to submit to the Foreign Bank Account Report (FBAR) or the Foreign Account Tax Compliance Act (FATCA). These are usually filed on separate forms in addition to your regular tax sheet.
With recent changes in the law, the IRS can now demand foreign banks to reveal your account balances, which means that it’s practically impossible to escape paying taxes when you’re abroad.
Brush up on the new requirements and make sure that you know what is expected of you as an expat.
Tax Mistake 4: Filing jointly with a foreign spouse
Most U.S. expats working abroad are also married to a foreigner. In some instances, it is highly beneficial to file taxes as a couple, especially if your spouse is a resident of the country where you are staying or if they are unemployed.
This can confer certain benefits and deductions that could not be availed of otherwise.
However, take note that this has to be done on a case-to-case basis. If it so happens that your spouse is not a resident but another alien or if they also have significant foreign assets, then the amount of taxes that you pay may even be greater than if both of you filed separately.
When in doubt, consult a professional accountant or someone knowledgeable about these matters. The last thing that you want is to get slapped with heavier dues because of a change in civil status.
Tax Mistake 5: Claiming tax exclusions and credits
Certain laws were created to make taxation less burdensome for the foreign worker.
For instance, there is something called a Foreign Earned Income Exclusion that allows you to exclude approximately $100,000 of your income.
Another is called a Foreign Tax Credit, which prevents double taxation by reducing your payment at home for every dollar paid in taxes abroad.
However, many of these benefits are not calculated automatically. To get an exclusion, an expat has to prove that he qualifies for it, usually by submitting a Proof of Living Abroad or a residency test.
If the applicant is denied because of incorrect or missing information, then the benefits are withheld, which means that money that could have been saved is needlessly wasted on taxes.
In order to claim your tax credits and exclusions, make sure you know what requirements to submit. A temporary hassle can yield tremendous refunds year after year.
Tax Mistake 6: Copy-pasting your tax return
In an effort to make their lives less complicated, many expats do the hard work once (usually with the help of their company accountant) and then simply copy and paste the same information for all succeeding tax seasons.
It’s true that filing taxes becomes more or less a mechanical process once you’ve gotten that hang of it, but recognize that the IRS isn’t a static organization.
New laws and statutes are released on a frequent basis, and if you’re not keeping watch, then you can incur some heavy fines or lose out on potential benefits.
For instance, in recent years, filing deadlines have changed, tax brackets have shifted, and a major reform law was passed during the Trump administration. Expats who keep doing the same thing will quickly find out that they are behind the tax times.
An easy way out of this dilemma is to do annual research on big changes in the news, consult with your company’s accounting department, or use an automated tax tool that is frequently revised to be in line with the current tax law.
With enough practice, you should be up to date in no time.
Filing taxes is definitely a hassle, but so is incurring heavy losses and fines.
Ultimately, it comes down to your level of preparation. With enough patience, your expat work life doesn’t have to be compromised by the reality of the IRS.
In fact, many workers have come to realize that taxes are simply a part of the responsibilities of being an adult, and they can be done with pride knowing that you continue to contribute to the needs of your country back at home despite being thousands of miles away.
Stay smart and keep abreast of the changes so that you’ll be smooth sailing all year round (and keeping the tax man happy while you’re at it).