Top Tax Pitfalls for Americans Living Abroad: Taxes can be confusing, especially when you factor in the complexities of living abroad. That’s why experts like Davidoff Accounting & Tax Services advise their customers to be updated on the tax rules and regulations of the country they are moving to.
As an American living overseas, you may be subject to both U.S. and foreign taxes, and it’s important to understand the risks and potential pitfalls of filing taxes abroad.
Here are the top 8 tax pitfalls to watch out for:
Failing to File Your Tax Return
One of the most common mistakes made by Americans living abroad is failing to file their tax return. Even if you don’t owe any taxes, you must file a return and report your income. Failing to do so could result in hefty penalties and interest fees.
Not Claiming Foreign Earned Income Exclusion
If you’re living and working abroad, you may be eligible for the Foreign Earned Income Exclusion (FEIE). This allows you to exclude up to $105,900 of earned income from your taxable income.
As an American living abroad, you may be unaware of the benefits of claiming the Foreign Earned Income Exclusion (FEIE).
This exclusive provision of the U.S. tax code allows U.S. citizens and residents who are living and working overseas to exclude up to $105,900 of their earned income from their taxable income for the 2018 tax year. Not claiming this exclusion can be a costly mistake and may result in increased tax liabilities, penalties, and interest.
When an American citizen is living and working abroad, their employer will often deduct taxes from their paycheck as if they are liable for taxes in their country of residence. This can lead to double taxation if the taxpayer does not file for the FEIE.
Without the FEIE, the taxpayer is liable for U.S. taxes on their income, as well as taxes in their country of residence. This can result in a significant tax burden and can be avoided by filing for the FEIE.
In addition to double taxation, not claiming the FEIE can result in costly penalties and interest. The IRS imposes a 5% penalty on the amount of taxes owed for each month that the taxpayer is late filing their return. This penalty can add up quickly and can be avoided by filing for the FEIE.
The IRS also imposes interest on the amount of taxes owed, which can also be avoided by filing for the FEIE.
Not Claiming the Foreign Tax Credit
If you do have to pay taxes in the country you are living in, you may be eligible for a foreign tax credit. This credit allows you to offset the taxes you paid abroad against your U.S. taxes.
First and foremost, it’s important to understand what the Foreign Tax Credit is and how it works. In short, it’s a credit that allows taxpayers to reduce their U.S. income tax liability by the amount of foreign taxes they’ve already paid.
So, if you’ve paid $5,000 in foreign taxes, you can reduce your U.S. income tax liability by that same amount. This credit is available for taxes paid on both income and capital gains, and can be claimed for taxes paid in any country.
Unfortunately, many Americans living abroad fail to take advantage of this credit. This can be a costly mistake, as it can potentially lead to an overpayment of U.S. taxes. Additionally, if you fail to claim the credit and are audited, you may be subject to penalties and interest on the back taxes you owe.
Not Reporting Foreign Assets
Americans living abroad must also report any foreign assets they own, such as bank accounts, investments, and real estate. Failure to report these assets could result in penalties and fines.
Living abroad can be an exciting and rewarding experience, but it is important to be aware of the potential pitfalls of living overseas. One of the biggest issues for Americans living abroad is the issue of not reporting foreign assets. This can have serious consequences, including steep fines and even jail time.
For Americans living abroad, it is important to understand the reporting requirements for foreign assets.
The Foreign Account Tax Compliance Act (FATCA) requires taxpayers to report certain foreign financial accounts and assets to the Internal Revenue Service (IRS). Failure to do so can result in hefty fines, and can even lead to criminal penalties.
Another important thing to keep in mind is that any income earned from foreign assets must be reported to the IRS.
This includes income from investments, rental income, and passive income. Not reporting this income can also lead to hefty fines and penalties.
Not Understanding the Impact of Social Security and Medicare Taxes
Social Security and Medicare taxes still apply to Americans living abroad, even if you are not paying income taxes in the U.S. It’s important to understand how these taxes will affect your overall tax liability.
Social Security and Medicare taxes are taxes that are usually automatically taken out of an American’s paycheck. This money goes into a fund to pay for Social Security and Medicare benefits.
When living abroad, however, these taxes may not be taken out of a paycheck. This means that if the American returns to the United States, they may have to pay the back taxes that were not taken out. This can be a huge financial burden and can cause a lot of stress.
In addition, there are certain exceptions for Americans living abroad that may exempt them from these taxes. It is important for Americans living abroad to understand these exceptions and make sure that they are taking advantage of them.
Not Understanding the Impact of Exchange-Traded Funds
Exchange-traded funds (ETFs) are popular investments for Americans living abroad. However, you must be aware of the tax implications of these investments. Specifically, ETFs may be subject to capital gains taxes, so it’s important to understand how these will affect your overall tax liability.
Conclusion
Living abroad can be a rewarding experience, but it comes with its own unique set of tax requirements. By understanding these 8 tax pitfalls with the help of Davidoff Accounting & Tax Services, you can ensure that you are compliant with all U.S. and foreign tax regulations.
