U.S. Expat Taxes Cheat Sheet

  • Tax reporting obligations

    US income tax return filing is different for people born in the US and living abroad:

    • In order to report worldwide income, the US citizens and resident aliens have to file Form 1040, 1040A, or 1040EZ. This is also valid in cases when the person has US income source or the income is coming from another country from where tax is being deducted from it.
    • Things to report include dividends, wages, compensation for service and all interests. A person who is a non-resident alien and is engaged in the trade of business in the US needs to file US income tax return. Refund overpaid or withheld tax can also be claimed by a non-resident alien if he wants to claim an alien refund. This can also be done if there is a need to claim the benefit of credits and deductions.
    • For instance, a non-resident alien having no business activities in the US but receiving income from real property as effectively connected income then he needs to file the true return in order to take allowable deductions against this income.

    Non-Resident Spouse

    Another situation can be when you are married and one spouse is non-resident alien and the other one is a resident alien or US citizen:

    • For the tax purpose, you can treat non-resident spouse as US resident. This is possible in cases when one spouse is non-resident alien at the start of the year and resident alien in the end while the other spouse is non-resident alien at the end of the year.
    • There are some rules that apply to making this choice. In the first place, you and your spouse will be treated as US residents for income tax purpose for all tax years and you will have to file joint income tax return for the year when you make this choice. On this joint income tax return, each spouse has to mention his worldwide income.
    • Be careful if you select this choice because your tax bill can be doubled. Better to report Married Filing Separate.

    Standard Deduction and Personal Exemption

    Standard deduction amount varies according to your filing status. It is the dollar amount that reduces the income amount on which you are taxed:

    • For People who are above age 65 years and who are blind, some additional standard deductions are also available. If you itemize deduction then you will not be able to take a standard deduction. Some individuals can only take a reduced standard deduction or cannot even take standard deduction if they are claimed on another person's tax return.
    • Taxable income is reduced with exemptions. In 2016 for each exemption you claim you can deduct $4,050. If gross income of a person is above the certain amount he can lose a part of or all exemption.
    • Two main types of exemption are there that a person can take and they include an exemption for yourself, for spouse and for dependents.
    • If someone is married and one spouse is a resident alone and the other one is a non-resident alien, then he can choose to treat non-resident spouse as US resident. This is applicable in situations when one spouse is non-resident alien at the beginning of the year and non-resident alien at the end of the year, while the other spouse is a non-resident alien.
    • When a couple makes this choice some rules apply. Firstly, you and your spouse are treated as US resident for all tax choices in effect. In addition, a joint income tax return must be filed in the year this choice is made. As a resident of the foreign country neither you nor your spouse can claim tax treaty benefits and both will be taxed for their worldwide income.
    • However, a resident alien can claim a tax treaty benefit on specified income. In order to make this choice, a statement is needed that should be signed by both spouses for a joint return for the first tax year in which choice is applied. Important documents that are needed to be attached include a declaration that one spouse was a non-resident alien and other was a US citizen or resident alien. You also need to choose to be treated as US resident for the whole tax year. Name, address, social security number and tax identification number of each spouse should be provided.

    Foreign Earned Income

    This claim can be made if you have filed Form 2555 foreign earned income exclusion:

    • The maximum amount of earning in case of self-employment subject to social security is $118,500.
    • In order to claim foreign housing exclusion or foreign earned income exclusion, you need to have foreign earned income. The tax sum should be in a foreign country and you must be a US resident alien who is a citizen or a nation that is a bonafide resident of a foreign country for an uninterrupted period that includes the whole tax year.
    • If you complete appropriate part of form 2555 you can choose foreign housing exclusion or foreign earned income exclusion.
    • In addition above, deduction or exclusion from gross income can also be claimed for housing amount if tax home is present in a foreign country. However, for this, you need to qualify for deductions and exclusions under physical present test or bonafide residence test.
    • For employed provided earnings the foreign earned deduction applies only to amounts that have been paid with employer-provided funds. As foreign housing exemption applies to amounts paid for self-employment earning so someone who is not self-employed cannot take foreign housing deduction.
    • Housing expenses are those that are reasonable expense incurred or paid for housing in the foreign country. While calculating deduction and exclusion for foreign housing cost, housing expenses are considered only for that part of the year when you qualify for foreign earned income exclusion.

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