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U.S. Taxes for Americans Staying Abroad

U.S. citizens living overseas are required to report their worldwide income to the IRS, including financial accounts held overseas. The IRS’ persistent efforts to curb tax evasion lead to the strict enforcement of the Foreign Account Tax Compliance Act (FATCA). Failure to report income results in a serious penalty. The Motley Fool shares:

“Deadlines
u.s. income tax“Let’s start with deadlines. The one for filing your income tax return is the same whether you’re in-country or out of the country. Those who are U.S. citizens or resident aliens living abroad or on active military duty abroad are allowed an automatic two-month extension for filing returns and paying taxes due. It’s so automatic that you needn’t file any form requesting the extension. There’s a little annoying detail, though: If you owe taxes that are due on April 15 and employ the automatic extension postponing the deadline to June 15, while any penalties you might owe for late payments don’t start getting calculated until the later date, the IRS will start the interest-due-on-late-payments clock ticking after April 15. (So, it’s best to get taxes due in by April 15, though you can file the accompanying return as late as June 15.)

“Reporting income
“The IRS expects you to report all income you collect during each tax year, no matter where you earn it. It also holds you to just about all of the same tax rules as everyone else. That means that not only do you face taxation on your income, but you also get to take advantage of available deductions, credits, and tax breaks — plus some tax breaks just for you.

“The Foreign Tax Credit and the Foreign Earned Income Exclusion
“These are two key tax breaks for expats and it’s important to note that you don’t get to use both to reduce taxes on the same earnings. So run the numbers and see which one will benefit you the most.

“The Foreign Tax Credit applies if you paid or accrued foreign taxes to another country on income that’s also subject to U.S. income taxes. If you qualify, you can take it as a deduction or a credit, and taking it as a credit is usually most beneficial. The credit can be taken by most folks via Form 1116, and it can be for up to all of the foreign taxes you pay.

“The Foreign Earned Income Exclusion lets you exclude from your gross taxable income much or all of the income you earned abroad and, in many cases, some of your foreign housing costs, too. The income you can exclude is capped at $101,300 in 2016, and the housing costs you can exclude are those that exceed 16% of your excluded income, with that sum being capped at 30% of your excluded income. Other rules and restrictions apply, too, of course.

“As you can probably see, these two tax breaks can often wipe out an expat’s entire tax bill that would have been due to Uncle Sam.”