Thomas LR Griffiths is a tax advisor and consultant specializing in US expatriate tax matters. Thomas explains the top 10 strategies for US tax planning today.
Taxes revolve around more than how much you earn. Your business, personal finances, and expenses also factor into tax issues and can drastically alter what you are liable to pay.
US tax laws are already somewhat complicated, and US expats can expect additional changes and difficulties when they live abroad. Most people don’t have the extensive knowledge or practice to sort their expatriate tax matters without professional guidance.
Since the US is one of the only countries to tax citizens regardless of where they reside, citizens are required to report and file a tax return wherever they are located and however long they have been there. The bright side of this situation is the various methods available to reduce or altogether cancel out your US tax obligations.
So, how can you avoid paying more tax than necessary? The answer is simple: have a tax strategy.
Tax planning might sound complicated, and it can be, but we’ll go through the most important things you should know. And remember, you can and should discuss your tax profile with an advisor for additional support and specialist assistance.
For instance, Thomas Griffiths is an enrolled agent and member of the Association of Taxation Technicians (ATT). As an essential part of the Ingleton Partners team, Thomas Griffiths can offer specialist assistance and services for US citizens living in the UK who are dealing with expatriate tax matters and has years of experience working with the Internal Revenue Service. Experts like Tom can give vital insights and advice to keep you compliant.
Tax planning strategies
There are many ways to reduce your tax bill, from deductibles to tax breaks, agreements, avoiding penalties, and more. A tax specialist, preferably an enrolled agent and member of the ATT (Association of Taxation Technicians), will be able to help.
You might not be eligible for every option, but there will be at least one thing on our list that suits your situation.
As a US citizen, you will need to file a tax return, even if you don’t owe any money. The IRS has access to foreign bank accounts owned by Americans and can impose heavy fines on those who fail to adhere to US tax rules.
Individuals must complete their tax returns by 15 April. Those whose tax home is outside the US have 2 months extra and must file by 15 June. You don’t have to apply for this extension but will need to include a statement clarifying that your tax home was outside of the US on 15 April, when regular taxes were due. Only one person needs to be outside the US to claim this extension when filing jointly.
Notably, although the extension is automatic, it does not relieve taxpayers of the interest accrued on unpaid tax liability amounts.
Foreign tax credits
If you live and work in a country outside the US, you will likely have to pay income taxes there as well. Since the US taxes its citizens even if they live and work elsewhere, you could be taxed twice.
When you file your US tax return, you must fill in form 1116. This allows you to claim the foreign tax credit. The system essentially allows you to claim credits equal to the amount of tax you have paid abroad (e.g., in the UK), which reduces your IRS tax bill. You might find you end up owing nothing on your US tax bill or even carrying excess tax credits forward if you live and work in a region with a higher tax rate.
The foreign tax credit system is liable to change, and expats should improve their understanding either through their own research or by consulting a US tax specialist.
Filing taxes during the first year
If you have only recently moved abroad and will be paying taxes in the new country, you may want to obtain an extension that allows you to defer filing until you qualify for a foreign tax exclusion. Alternatively, you may file and pay your taxes as usual. Once you are eligible for the foreign tax exclusion, you can file an amended return and apply for a refund. Tax specialists and enrolled agents are ideally positioned to assist with expatriate tax matters, including reviewing and amending returns that have already been filed.
Child tax credits
US parents living abroad whose children have an American social security number can claim up to $2,000 in tax credits per child. In addition, if your US tax is already zero because of foreign tax credit claims, you may find you are eligible for a $1,400 refund per child.
Foreign income exclusions
If you are living and working in a foreign country with a lower tax rate than the United States or are not paying taxes working as a digital nomad, you may still be able to reduce your tax bill. The foreign-earned income exclusion allows US citizens who spend 330 days or more in a year outside the US to exclude up to $108,700 from US taxes.
Foreign housing exclusion
Those renting a home abroad can exclude additional earnings over the $108,700 foreign income exclusion limit from US tax obligations. To do this, you must claim the foreign housing exclusion using form 2555.
You will be liable to pay Medicare and social security taxes if you are self-employed and living outside of the US. While neither foreign tax credits nor income exclusions will negate your social security liability, the Totalization Agreement between America and 30 other countries will. According to this tax treaty, US citizens need only pay social security in the US or their country of residence. For those living in the UK, this would be National Insurance.
Did you know that giving money to charitable organizations could also help you lower your tax bill? You could receive a tax deduction if you regularly donate to nonprofit organizations. Donations can be monetary or in the form of physical goods. You will need to find and record all donations and provide appraisals for non-monetary contributions.
A tax specialist like Thomas Griffiths is ideally positioned to assist in more complicated expatriate tax matters like this. As an enrolled agent and member of the ATT (association of taxation technicians), Thomas Griffiths can offer specialist assistance with US expatriate taxes.
Outside of these credits, deductions, and exclusions, there are other things you can do to ensure your taxes go as smoothly as possible.
Accurate bookkeeping and accounting are essential parts of tax-paying. Careful documentation of your processes will help you stay on the right side of the IRS (internal revenue service) and allow you to identify potential deductions more successfully.
Those running businesses may benefit from changing their entity (an organization formed for conducting business). Different entities are subject to different tax rates in different states. We recommend discussing entity-related options with a US tax specialist before updating this.
Analyze business-related expenses
Whether you own your own business or are employed, claiming business-related expenses is essential for managing your tax profile. As an employee, you should be reimbursed, and as a business owner, you may be eligible to claim tax deductions on business-related expenses. As with all things tax, keep an accurate and up-to-date record of these expenses.
This list of strategies for managing expatriate taxes should give you a solid idea of where to start and where you may be able to claim tax bill exclusions, deductions, and credits.
Even with a clear idea of strategies, understanding and correctly applying these to your tax plan can be difficult without in-depth knowledge and practice in the field. Therefore, you should discuss your plans with a tax expert specializing in US expatriate tax matters if you feel uncertain or like you are paying more than you should.