Tax Reduction Strategies for U.S. Expats
While working in Moscow, Russia as a tax accountant I was approached by a leading local expat newspaper to write an article on the tax reduction strategies for U.S. expatriates. I now operate my own tax practice in New York City but continue to work with expatriates worldwide.
U.S. expats should find this article helpful. If you have any questions or comments feel free to send me a message or reply on the thread.
The Three Main Tax Reduction Strategies Every U.S. Expatriate Should Know
By Roman Yoffe
A key aspect of living and working abroad often overlooked by expatriates is taxes. Each present and would-be expatriate must be aware of the tax consequences they face by living and working in a foreign country. The good news is that the IRS grants substantial tax breaks to U.S. expatriates. Three IRS tax breaks stand out in particular: The foreign income exclusion, the housing exclusion/deduction, and the foreign earned tax credit.
The Foreign Earned Income Exclusion
Most Americans know that the IRS taxes United States citizens and residents on their worldwide income, regardless if it is earned in Washington, D.C., Moscow, or Dubai. The foreign earned income exclusion provides some relief for expatriates working abroad. For the Protected content year, for example, U.S. expatriates are allowed to exclude $85,700 from their income. Thus, if income from wages was $100,000 in Protected content the foreign earned income exclusion was claimed, the total taxable income would be $14,300. To qualify for the exclusion a U.S. citizen must be a bona fide full year resident of a foreign country or alternatively spend Protected content in the foreign country out of every tax year.
The Foreign Housing Exclusion/Deduction
Not everyone can afford a principal residence back home and also rent an apartment in a foreign country. To relieve this burden, the IRS has made available the foreign housing exclusion/deduction. Employed individuals may claim the exclusion and self-employed individuals may claim the deduction. To figure how much you qualify for simply do the following:
Multiply the foreign earned income exclusion by 16% ($85,700 X 16% = $13, Protected content subtract it from your annual rent. For example if your annual rent in Protected content $40,000 you will be allowed to exclude $26,288 from your income ($40,000 – $13,712). Moscow based expatriates should be pleased to know that they may claim housing expenses in the amount of no greater than $90,900, an amount second only to Hong Kong ($114,300). To claim the exclusion the rent must be paid with employer provided amounts. The deduction may be claimed against rent expenses only. Mortgage payments do not qualify for the housing deduction.
The Foreign Earned Tax Credit
The IRS also provides some relief from double taxation. In some cases paid foreign income taxes may be credited against your U.S. tax liability. For example:
Gross wages in Protected content $200,000, foreign taxes paid were $26, Protected content and the foreign earned income exclusion was claimed ($85,700). Since the foreign earned income exclusion was used it must be deducted from gross wages and multiplied by the foreign tax rate [($200, Protected content X 13%] = $14,859. Therefore a credit of $14,859 may be claimed against your U.S. tax liability. There is no need to claim the tax credit if income is equal or less than the foreign earned income exclusion ($85,700).
Various other tax reduction strategies (as well as liabilities) may exist given your specific situation and it is important to go over everything in detail with your tax professional. At a minimum, however, every expatriate should be aware of the three strategies discussed above and keep them in mind as tax season approaches.