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Whether you are moving abroad to study, travel, put up a business, or work, one of the many things you should not forget to do is to inform the IRS. Not many people know this but U.S. citizens or resident aliens residing overseas are still obliged to file their U.S. income taxes. Knowing what steps to take regarding your taxes will certainly help you avoid legal problems in the future.
U.S. Expatriate Tax Law Overview
As a general rule, your income is subject to U.S. income tax, regardless of where you reside. This isn’t a new policy but with the massive tax overhaul for the past 30 years, the tax filing process and obligations for expats have undergone significant changes.
While the tax rates have decreased slightly, the tax brackets have become larger. This means that Americans living overseas could belong to lower tax brackets and face lower taxes, depending on specific situations. Generally, your income tax covers your wages/salary from the U.S. and non-U.S. sources, dividends, rental income, and interests. You are also bound to pay your estate and gift taxes.
For citizens residing in the country, the regular due date for filing tax returns is April 15. However, under the U.S. tax laws, citizens and aliens residing abroad are given an automatic 2-month extension to file their taxes and pay their dues. This means you can file your taxes on or before June 15. For military personnel serving combat zone or qualified hazardous duty area, there is a different extension deadline. Meanwhile, for married couples, either one can qualify for an automatic extension if they filed a joint return. If filing separate returns, the automatic extension only applies to the spouse who qualifies. You can request for an additional extension if you need to, but you then have to file Form 4868, before the automatic 2-month extension date.
Important Things to Do When Filing an Expat Tax Return
Check if you qualify for special tax credits and exclusions.
Moving abroad does come with a cost. Whether you’re moving overseas for personal or professional reasons, you will incur expenses (a large part of which to be allocated in preparation for the move). You have probably used up your savings and considered personal loans online to settle moving expenses. But the bills don’t end there. Even though you’ve already stepped foot on foreign land, you still have obligations in your homeland, specifically taxes.
The good thing is you can get special tax credits and exclusions to reduce your expat tax income. These include the Foreign Earned Income Exclusion and the Foreign Tax Credit.
To qualify for the Foreign Tax Credit, you must qualify for either one of two tests—Bona Fide Resident test or the Physical Presence test. For the latter, you have to physically stay in the foreign country for 330 days in a 365-day period. For the former test, the requirement is you must live in a foreign country for at least one full calendar year and have established a bona fide residency. This means you have an established residency in that country and you intend to stay there indefinitely.
The Foreign Earned Income Exclusion (Form 2555), on the other hand, protects your foreign salary or wages from your income from being taxed by the U.S. government if it does not exceed $104,100 (as of 2018). This exclusion may also cover your personal services or certain foreign housing costs.
Additionally, the Child Tax Credit can also help you save money on your tax dues. To qualify, the IRS requires that all dependent children must have a U.S. Social Security number.
Know your state tax laws.
Your expat tax obligations are largely affected by your state laws. It is important to know the specific expat tax laws of your home state as they differ from one state to another. For example, in California, South Carolina, New Mexico or Virginia, you are most likely bound to pay state taxes, even after you moved overseas. Meanwhile, in states like Washington, Florida, and Alaska which have no state taxes, your state tax is not an issue.
Update your tax details.
Updating your tax information requires a lot of paperwork, but it’s one of the first few things you should complete to ensure that you have a smooth expat tax filing experience. If you change your address before filing your return, you have to enter your new address on your return when you file. If you change the address after filing your return, the IRS requires that you notify the post office that services your old address. You may also change your address by completing the Form 8822 or by writing.
Where should you file your expat income tax?
You can send it via mail, to the following address:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
If you have AGI (Adjusted Gross Income), you can file your return online either through the IRS Free Tax Filing service or through a commercial tax filing software.