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Strategies for Decreasing U.S. Tax Obligations When Living Abroad

Strategies for Decreasing U.S. Tax Obligations When Living Abroad

For U.S. residents that do not wish to renounce U.S. citizenship, but that will be living and working abroad, it is necessary to file all worldwide income with the U.S. for taxation purposes. Understanding exactly which deductions are applicable can help to reduce the total amount of U.S. tax obligations. The following are a few strategies that may be helpful when it is time to file.

Determine Qualification for Foreign Earned Income Exclusion

Qualification for Foreign Earned Income Exclusion, or FEIE, is determined based on two tests that relate to the amount of time spent in a foreign country. When individuals qualify for FEIE, it may be possible to exclude a portion of foreign earnings from income. In 2015, individuals that qualified for FEIE could exclude up $100,800.

The Tax Home Test, or THT, is determined based on where an individual does the majority of work and must be outside of the U.S. for an indefinite amount of time that spans at least one year in order for an individual to qualify for FEIE. The other qualifier of FEIE can be either the Bona Fide Residence Test (BFR) or the Physical Presence Test (PPT). BFR requires that expatriates have residency in one country for an entire year. PPT requires expatriates to be present in one foreign country for at least 330 days of a year.

Determine Qualification for Housing Exclusion or Housing Deduction

When earning abroad and filing with the U.S., it may be possible to claim a deduction for housing expenses. Individuals that are self employed may be able to claim a housing deduction (HD), while individuals employed by another may be able to claim a housing exclusion (HE). To qualify for the HE or HD, an individual must pass the BFR test or PPT. The amount of deduction or exclusion cannot exceed income earned overseas and does not include expenses that are considered extravagant.

Maximize Deductions on U.S. Properties and Business Income

In many cases, expatriates that plan on returning to the United States continue to hold real estate or commercial property in the United States. The income from property that is rented out or business that is conducted within the United States must also be claimed when income taxes are filed. Cost segregation can help an individual to claim the greatest amount of depreciation on commercial real estate assets held in the U.S. This can help to reduce overall tax obligations for a year.

Consult Expatriate Tax Professionals

Filing taxes when earning income both inside and outside of the United States can become complex when living abroad and maintaining U.S. citizenship. In addition to the deductions and exclusions listed above, there may be tax treaties that have been formed between the United States and certain countries that may apply. Consulting with tax professionals that are experts in international tax policies may help to reduce total obligations substantially while adhering to applicable laws.

Written by: Amanda Bead, email amanda@elbcostseg.com

Amanda Bead is a recent college graduate and avid writer. While her primary focus in college was Psychology, Bead minored in English Literature and Accounting.

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