US tax season is here: Act now to get your refund sooner
Let's be honest: very few people enjoy doing their tax returns. There's paperwork to sort, forms to fill and a lot of boring administrative tasks to complete. When you're an American living abroad, it can seem even more confusing as it's easy to miss important changes to the system.
That said, there are compelling reasons to stay on top of your US taxes from overseas, especially if you belong to one of a few key groups.
For most adult Americans, there's an obligation to file taxes every financial year wherever you are in the world. While April 18 is 'Tax Day' for 2023 back home, Americans abroad are granted a deadline extension of almost two months, to June 15.
With this extra time, it's a great opportunity to make sure you have everything in order. It may even save you money. Together with MyExpatTaxes, creators of tax software specifically designed for Americans abroad, we look at which groups could benefit the most from staying up to date with their tax filings.
Living as a digital nomad is an appealing prospect for many Americans in Europe, giving flexibility in lifestyle and the chance to explore new cultures. However, it's important to remember that you're still required to file a tax return if you've met the tax filing threshold in terms of income – that's $12,950 in a financial year if you're under 65 (it's $14,700 if you are older and there are different thresholds if you're married). For those who are self-employed, the filing threshold is even lower at $400 net self-employment profit, for all ages.
However, this isn't to say that you'll necessarily owe money. The Foreign Tax Credit (FTC) can be used to deduct income taxes paid abroad against US taxes owed, so you are not double taxed. If you’re not paying enough foreign income taxes, the Foreign Earned Income Exclusion (FEIE) can also be used to exclude up to $112,000 of foreign wages or self-employment income from being taxable by the Internal Revenue Service (IRS). That's a big deal! It’s important to note, however, that you can’t claim the FTC on the income you’ve excluded using FEIE.
If you have more than $10,000 of combined balances in your foreign financial accounts, you’ll be required to complete a Foreign Bank Account Report (FBAR). It's essential to do this, as failure to report foreign bank accounts could result in costly fines.
If you've been a digital nomad for a few years, catching up on your taxes could also prove profitable. Many Americans abroad have yet to claim the stimulus payments issued in response to the Covid-19 pandemic.
Be aware: the 2023 tax year will be your last opportunity to claim the first stimulus check. If you have have not claimed it, you can do so by completing your outstanding returns up to and including the 2020-2021 financial year.
If you live with your family in Europe, completing your US taxes can be slightly more complicated. However, making sure you do so could result in a welcome windfall at a time of economic uncertainty.
If you are married to a non-US citizen and want to file as Married Filing Separately, it's important to know that the income threshold starts at just $5.
However, the greatest incentive for those with families to catch up on their tax is the Child Tax Credit (CTC). The CTC allows you to deduct up to $2,000 from your tax bill for each eligible child. If you have no tax bill to pay, up to $1,500 per child is returnable.
To be eligible for the CTC, each child must be under 17 and be a US citizen, national or resident, with a valid social security number. Additionally, they must have resided with you for at least half the year, and have provided no more than half of their own financial support.
Please note that you can only claim the refundable CTC on your tax return if you haven’t used the FEIE.
When it comes to claiming outstanding stimulus payments, you may also find that dependent children are eligible for a payment of between $500 to $600 each. Put simply: American families filing their US taxes from abroad could end up with a substantial refund, so it's well worth your time!
Running your own business in Europe can lead to many amazing opportunities. That said, as a business owner you really do want to be on top of your tax affairs, so you can pursue your dream career with confidence.
Depending on how your business is structured – a sole proprietor, an LLC, a corporation or a partnership – you'll need to file the appropriate forms, drawing the information from the records you've kept through the year.
As a business owner with foreign bank accounts, you'll also need to file an FBAR covering any accounts that you have signature authority over. Failure to do so can be very costly, considering that the IRS can fine you up to $10,000 for each account that is not reported.
If you're an American enjoying your retirement in Europe, you can gain valuable peace of mind by making sure your tax return is done. You'll most likely have paid into social security over time, before moving to Europe. Ensuring that all returns are filed correctly makes it easier to calculate how much you can expect to receive in payments.
It also allows you to better manage your money, as your US social security payments can still be taxable in the US. FEIE cannot be claimed on social security, as that income wasn’t earned abroad. FTC can be claimed if foreign income taxes were paid on those amounts. However, first check your country's Tax Treaty with the US to see which country has the taxing rights.
You may have missed out on stimulus payments, so completing outstanding tax returns can go some way to reducing your tax burden.
When completing your tax return, it may also be time to file an FBAR on any foreign bank accounts you have or risk a heavy fine, as described above.
Need a hand filing your taxes?
Completing your taxes can feel overwhelming. Take into consideration your family circumstances, or your business operations, and you may be tempted to file it in the 'too hard' drawer. However, there are user-friendly tools that allow you to file your taxes in a simple, almost painless manner.
One such service is MyExpatTaxes. Founded in 2018 in Vienna by IRS Enrolled Agent, Nathalie Goldstein, it's the leading and most trusted tax return preparation service for US expats, praised by Yahoo Finance and winner of a slew of awards.
MyExpatTaxes' software uses a series of straightforward questions, formulated by an expert team of tax specialists, to complete your return. There are a number of affordable pricing plans to meet the needs of different groups and whichever you choose, a team of tax specialists is there to help, speaking your language.
Nobody enjoys doing their US taxes from abroad, but staying up to date avoids potential pitfalls, and could result in a decent tax refund. That means more opportunities to explore the place you've decided to call home!
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