We all know how complicated the US tax law can be. Therefore, if you are working abroad, it is important to learn more about it and avoid penalties and other potential problems. It is different from most other countries, and one of the main reasons for that is that you will have to report your income and pay taxes even when working abroad. Here are some important things to know about taxes for expats.
1. It Applies To All US Citizens
There is a clear law that says that you will have to report taxes in the US, no matter if you are working in some other country. Those who are working in the US from abroad should do the same as well. Even in case that you never lived in the US but you have their passport, it will be required to report your income.
2. You Can Reduce the Bill
It is very important to learn more about this process and avoid a situation where you might have to pay tax for the same income twice. While there is a tax treaty, keep in mind that there is also a saving clause that will allow the Internal Revenue Service (IRS) to charge you with taxes even though you already paid them in the country where you are working. The only exceptions here are scientists, students, and teachers.
On the other side, there is a simple solution to avoid this problem, and you can do that by requesting the Foreign Tax Credit or Income Exclusion. You can use the tax credit as a way to prove that you paid taxes in the country where you live at the moment. It only applies for the income you made outside of the US. Therefore, you cannot use this model for additional income that you make in the US, like renting, investment, pension, and more.
You can file a form 1116 to request the tax credit, and the key feature is that it will help you erase the tax eligibility in the US for the money you earned abroad. There is another solution to avoid paying the taxes, which is buy using the Foreign Income Exclusion. There is a limit for this option, which is around $110,000 per year. Moreover, you will have to prove your source of income from another country by completing the Bona Fide Test.
Another option is to provide proof that you have spent more than 330 days outside of the US. Since there is always a chance for mistakes and complications, it is always the best solution to contact the expert in this field so you can choose the right approach where you will manage to avoid paying the taxes twice.
3. Use An App To Make Things Easier
Collecting and saving a lot of documents can be challenging, especially for someone without any experience. Therefore, a great solution would be to use an app for US Expat Tax. We can recommend you using the Expatfile tax software, which is the #1 US Expat Tax Filing Software. The main benefits are reliability, simplicity, and speed.
4. What About People With Children?
There are some additional benefits for expats with children. You can add the child tax credit when you are claiming the foreign tax. The amount that you can get per child is $3,000. Also, there is an option to use this feature to get refundable funds in the same amount. You can do that by filling the form 8812.
5. What About Foreign Accounts?
There is also the requirement to provide the additional report related to funds that you have in international banks. It is called the Foreign Bank Account Report. The important thing to know about this process is that there is a limit where you don’t need to report your funds, which is $10k. Also, you will need to provide details of different types of accounts like savings, pension, investment, and more.
6. What About Foreign Assets?
There was a problem with US citizens who were investing abroad because the whole process of reporting was very complicated, and there was an issue in tracking financial details in another country as well. That is the main reason why the officials introduced the Account Tax Compliance for expats who have investments in other countries.
The key of it is to prevent offshore companies from avoiding taxes. The limit where you can avoid it is $200,000. The best way to keep up with these regulations is to pay more attention to your reports and fill them on time.
7. What About Registered Businesses?
Those with a company in another country are also subject to the IRS. The point is that the officials will track your funds even though you are earning them on the market of another country or internationally. The fees are the same as for US-based businesses, and there are two forms that you will need in this case, the 8832 when you are reporting for the first time, and the 8858 each year.
8. What About Social Security Taxes?
The current regulations related to social security taxes are that you will have to 6.2% if you are receiving a salary in another country, along with the 2.9% of Medicare. The rate is higher for self-employed, and it is very important for freelancers and remote workers to be aware of this.
On the other side, the US officials are aware of the problem where people have to pay twice for the same income. Therefore, they have an agreement with more than 30 other countries where you will have to pay these taxes only in the US. However, this can be used for a period of five years.
Many other details can affect your reports and the ability to avoid paying double taxes on your income. In that matter, the best solution is to hire an expert in this area who will help you to have a clean history and avoid various problems. There are different methods that you can use to lower or avoid US taxes, but it can be complicated if you are a beginner.