Tax-Savvy Expat : Essentials is for US citizens and green card holders who live outside the United States. It shows you exactly how to use the US tax rules to your best advantage so that you pay as little US tax as possible (within the bounds of the law, of course).
Tax-Savvy Expat : Essentials covers the US tax topics that every expat needs to know: the foreign earned income exclusion, the foreign housing deduction or exclusion, and the foreign tax credit.
Each of these special expat tax rules has complicated and intricate requirements. Other sources of information on these rules are either (i) very dry and boring (like the IRS's official guidance) or (ii) just plain wrong and full of misconceptions (like advice you can read on internet forums).
Tax-Savvy Expat : Essentials provides information on these topics from an actual US tax attorney who practices in this area. Plus, this course brings these rules to life with clear explanations and graphic depictions of how all the rules work.
This course isn't just a re-hashing of the bare rules like you can find in any expat tax return preparer's free e-book. Instead, it contains several comprehensive examples that apply the rules to real-world situations.
This course isn't only for new expats, either. Expats who've been around the block a few times can also learn new tricks. For example, this course shows you how to contribute to an IRA even if your income is below the foreign earned income exclusion threshold.
After taking this course, you'll know:
Welcome to Tax-Savvy Expat : Essentials! This lesson is an overview of the entire course.
As a US citizen or green-card holder, you’re subject to US tax and must file a US tax return, even when you live outside the US.
However, as an expat, you can use special rules to lower your US tax liability, maybe even to zero dollars a year.
When you’ve finished this course, you’ll be an expert on the big three expat tax essentials: the foreign earned income exclusion, the foreign housing deduction/exclusion, and the foreign tax credit.
The foreign earned income exclusion allows you to pay zero US income tax on about $100,000 per year of income from working outside the US.
To claim the foreign earned income exclusion, you need to pass the tax home test and then either the physical presence test OR the bona fide residence test.
· The tax home test is generally not an issue. You’ll pass if you move outside the US and intend to be gone for at least a year.
· To pass the physical presence test, you just need to be outside the US for 330 days during any 12-month period.
· You pass the bona fide residence test when you make a new home in a foreign country.
If you simply spend less than 35 days per year in the US, you’ll always pass the physical presence test.
But life can sometimes be more complicated than that—you may want to spend more time in the US in a given year.
This lesson shows you the exact effects of spending more than 35 days in a year in the US. It may not be as bad as you think!
This lesson also shows why counting days is very important. Just one day over the line can disqualify you from using the physical presence test for a large part of a tax year.
This lesson discusses the factors used to determine whether you’re a bona fide resident of another country.
To make the best case for bona fide residence, you should:
· Become a citizen or permanent resident of your new country;
· Be subject to tax in your new country;
· Spend less than 4 months per year in the US;
· Have your immediate family with you in the new country;
· Not have a job with a set duration;
· Own a home in your new country; and
· Not own a home in the US.
Independent contractors, freelancers, and those who operate a business as a sole proprietor are all self-employed for US tax purposes.
Self-employed people are subject to a number of special rules that will cause them to pay some US tax:
· The foreign earned income exclusion only works for income tax purposes—it does not eliminate self-employment tax, which is about 15% up to $118,000 and about 3% over that;
· Certain sole proprietors can treat only 30% of their income as foreign earned income (and therefore excludable under the foreign earned income exclusion); and
· The amount of usable foreign earned income exclusion must be scaled back to account for business deductions.
The next two courses in the Tax-Savvy Expat series—Freelancer and Entrepreneur—discuss strategies to mitigate or eliminate the harsh effect of these special rules
If you have foreign earned income over the foreign earned income exclusion cap, you may be able to use the foreign housing deduction/exclusion to knock out all or some of that income.
However, the foreign housing deduction/exclusion only helps to the extent your housing expenses fit within a band.
That band starts at 16% of the foreign earned income exclusion cap (about $16,000), and generally ends at 30% of the foreign earned income exclusion cap (about $30,000).
The upper limit is higher for expats in cities with a high cost of living.
If you pay any foreign income tax, you can generally use the foreign tax credit to reduce your US tax on that income by the amount of foreign tax you paid.
The foreign tax credit works both on foreign earned income and other income as well. But you can’t take a double benefit—you can’t use the foreign tax credit for foreign tax on income that you exclude with the foreign earned income exclusion.
Ultimately, the foreign tax credit isn’t about how much tax you pay, it’s about which country you pay tax to. It simply eliminates double taxation.
For your foreign earned income below the foreign earned income exclusion cap, you should generally just claim the foreign earned income exclusion. However, there are certain narrow situations where claiming the foreign tax credit instead will work out better.
You did it—you’re now an expert on the three big three expat tax essentials!
This lesson brings together everything you know into a comprehensive example.
This lesson also has some further information and helpful hints that didn’t make sense to discuss in other lessons, like:
· The new due date for expat tax returns;
· How to reduce or eliminate withholding by your US employer;
· How to contribute to an IRA even if you make less than the foreign earned income exclusion cap; and
· How to structure your non-US business to avoid the negative aspects of self-employment.
Thanks for investing your time to take this course!
Check out www.ustax.bz for more articles and help on expat tax topics. Also, you can continue your journey by taking one of the other two Tax-Savvy Expat courses.
If you have special issues you’d like to discuss, email email@example.com to set up a call
Hi, I’m Stewart Patton, US tax attorney and expat entrepreneur.
I specialize in helping US citizens who live or invest outside the United States understand and optimize their tax situations.
I grew up in Midwest City, Oklahoma, then attended Texas A&M University and the University of Houston Law Center (graduating magna cum laude and Order of the Coif). I practiced for 12 years as a tax attorney in three large law firms, culminating as a partner in the Chicago office of Kirkland & Ellis LLP.
One cold winter morning, I heard the same little voice you may have heard: “There must be more to life than going to work while it’s cold and dark and the kids are in bed only to return home when it’s cold and dark and the kids are in bed.”
Thankfully, my wife is from Belize, where it’s sunny almost every day and the temperature sometimes dips into the high 60s when a cold front passes through.
So, I told my firm about the new life my family and I had chosen, we packed up the house, and I continued practicing US tax law as a solo practitioner in Belize.
I help Americans who live or invest abroad understand how US tax applies to them, properly structure their businesses and investments, and comply with the complicated disclosure requirements that only get stricter every year.