In 2022, many Americans residing overseas are uninformed of or confused about their tax reporting requirements in the United States. The United States’ tax system is unique in that it levies taxes depending on citizenship. Almost every other country either taxes based on residency (i.e., only persons who live in that country must pay taxes there) or taxes based on income earned in that country, regardless of location (known as a territorial based tax system). Expat tax is a Federal tax for non-residents. Expats must additionally claim exemptions or credits to decrease or, in many cases, erase their US tax burden. Filing from outside the US is more complicated than filing in the US because they must claim exemptions or credits to reduce or, in many cases, remove their US tax bill. They may also be required to disclose any foreign-registered enterprises, bank and investment accounts, and assets.
All American residents and green card holders who made more than $12,550 in 2021 (in total, in all currencies), or only $400 in self-employment income, or just $5 in any12wq income if married to a foreigner but file separately, must submit a US federal tax return stating their international income. Even though all Americans residing overseas must file in 2022 if their income exceeds the above-mentioned limits, the vast majority will not pay any US taxes.
This is because the IRS has created provisions available for ex-pats to claim when filing their tax returns to lower their US tax burden, which is usually nil.
A majority of Taxpayers in that case select either Foreign tax credit or foreign earned income exclusion.
The foreign tax credit allows the taxpayers living abroad to utilise US tax credits equal to the quantum of foreign income taxes that they paid in the previously resided country.
One thing to note is that foreign tax credit may be used to offset foreign taxes that were paid on incomes that were earned outside the United States and that can include pensions and investment income. To claim the foreign tax credit, IRS Form 1116 must be completed along with the annual return.
Another prominent option that is used by Expats includes the foreign earned income exclusion. The Foreign Earned Income Exclusion, on the other hand, may only be applied to earned income, such as salaries, self-employment, wages, commissions – in other words, payment for services rendered – and not to unearned, passive income, such as rents, pensions, dividends, or interest. If neither the Foreign Tax Credit nor the Foreign Earned Income Exclusion apply, ex-pats may have to pay US taxes and then seek tax credits in their home country to avoid double taxation. Most ex-pats, and especially those with any doubts or questions about filing – and filing in the most beneficial way possible, given their circumstances – should seek assistance from a US ex-pat tax specialist to ensure they file in a way that minimises their US tax bill in the short and long term. We at US Expat taxes are always available to assist you in whatever way possible. We have long experience in dealing with matters related to Expat taxes and professionalism, reliability and experience lie at our core. We hope we could help you in your journey and make it smooth. Feel free to contact us.