15 Ways You Can Save Money on Your Expat Taxes

Looking for expat tax tips that can help you save loads of money?  And are easy to implement?  You've come to the right place.  

Doing your own taxes is never easy, especially when you are an American living abroad.  And as an American myself, I feel ya.  

There are so many laws governing international taxes that it is definitely a hassle to try and sort through it all.  Not to mention the penalties for not filing or mistakes can be costly.

That's why I've done a wee bit of sorting for you and I've discovered some great expat tax tips that I wanted to share with you all.  

We'll go over some quick little known tips that you can do with ease that could save you thousands of dollars on your taxes.  Let's take a quick peak at what's in store.  

Expat Tax Tips At A Glance

Pay Your Taxes By April 15th

As you may know by now, as an expat you get an automatic two month extension on filing your taxes.  This means that your new deadline for filing is June 15th instead of the usual April 15th.

However, if you owe taxes or think that you might owe taxes, it is best that you pay these by the April 15th deadline.  If you do not, the taxes owed will accrue interest.  

And you will find yourself with a larger tax bill than when you started. Not to mention that there may also be late payment fees as well.  Yikes! So do yourself a favor and be sure to pay those taxes on time!

Choose Your Foreign Exchange Rates and Dates Wisely

This is one of those expat tax tips that not many people know about.  As an expat, you are, probably receiving your income in a foreign currency. That's fine but when it comes to filing your taxes you must convert this income into US dollars.

There are two main ways you can do this.  You could use the average exchange rate for the entire tax year or you could use the exchange rate for the date that you received your money.

Going the second route may be more cost effective as the individual rates may be much less than the year's average rate.  This could save you tons by lowering the amount of your taxable income.

In particular, if you receive yearly bonuses, you will definitely want to check the rates on the date you receive your bonus.  If it's better than the average rate, then use this.

Checking the daily rates for every single check you receive can be a pain and really you just may not have time for it.  If that's the case then using the average rate is fine.  

That or you could get a tax accountant to do it for you.  ; )

Choose Your Filing Status Wisely

Most of us never think too much about our filing status.  We simply check off the usual and keep it moving.  But do you know you can save thousands just by choosing the right filing status for you.

The status you choose can make it easier (or harder) for you to qualify for certain credits and deductions.  That's why it is important to choose your status wisely.

If you are single, claiming Head of Household opens you up to more tax breaks and better tax brackets.  To file under head of household, you would need to have at least 1 dependent.  

This can be a child, parent, or, in some cases, an extended relative.  If it is a parent or a relative, they do not have to live with you in order to be considered a dependent.  However, you still need to pay for at least 1/2 of their expenses.

If you are married, you may want to consider filing jointly.  Like head of household, this will give you much better tax brackets and allow you to claim more deductions and credits such as the Earned Income Credit.

On the other hand, you may want to file separately even if you are married if you believe your spouse is committing fraud or if your spouse has huge medical bills (that they want to deduct) for the year.

Ensure You Qualify For the FEIE By Filing This

Have you recently moved abroad?  Do you want to take the foreign earned income exclusion (FEIE) but think you will not qualify because you will fail the physical presence test?

When I first moved abroad, this also happened to me.  Luckily for me, I was apart of a program that essentially took care of everything for me. And helped me file all the necessary forms.  Now I know what those forms were for.

Form 2350 

This form is for those who wish to take the foreign earned income exclusion but will not qualify by the usual deadline.  It allows you to apply for an extension to file so that you may have the time necessary to qualify for the FEIE.  

It is a simple, one-page document that is fairly straightforward to fill out.

With this form, you can literally choose the date that you wish to file to ensure that you will qualify.  The IRS will usually give you up to a month after you qualify for the FEIE to file.

To request this extension though you must file by the original due date of your tax return.  For most expats that would be June 15th.  

Be sure to give yourself plenty of time in case your request is denied and you must file by the regular due date.

See Form 2350 (pdf) for more information and instructions.

Take the Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion (FEIE) is a benefit made specifically for us expats.  It is the easiest way to save thousands of dollars on your US taxes.  And is probably one of the biggest expat tax tips you'll hear of.

With the FEIE, you can exclude up to $105,900 of foreign earned income (for the 2019 tax year).  That means you won't have to pay taxes to the IRS if you make less than $105.9k!  Further, this amount is indexed to inflation so it increases every year.

To claim this benefit, your tax home must be in a foreign country and you must be a bonafide resident or pass the physical presence test.  You will need to file Form 2555 with your tax return to claim.

Be aware though that using the exclusion can prevent you from taking other credits and deductions.

Don't Forget About the Housing Exclusion

Another big expat tax tip is to claim the housing exclusion.  This exclusion can go a long way in saving you on your US taxes as it allows you to exclude rent, some utilities, insurance, and more.

By using the housing exclusion, you can greatly reduce the amount of taxable income you have.  And therefore, significantly reduce your tax bill.

In order to take advantage of this benefit though, your expenses must be greater than 16% of your FEIE.  Note, mortgage payments, purchased furniture, housemaids, and other "extravagancies" are not excludable.

To take this exclusion you must first qualify for and take the earned income exclusion.  Both exclusions are taken on the same form, Form 2555.

Claim the Foreign Tax Credit

Another godsend sent to us expats by there IRS is the Foreign Tax Credit. This was created to prevent double taxation on your foreign earned income.

Credits are amazing because they reduce your tax bill dollar for dollar. Some credits like the Additional Child Tax Credit are refundable which means they IRS could end up owing you money.

If your foreign taxes are more than your would be US taxes, you may want to consider taking the foreign tax credit instead of the exclusion. Sadly, you cannot claim the exclusion and take this credit on the same income.  That would be double dipping.

However, you can claim this tax credit on income that is not excluded with the FEIE.  

For instance, if you are a high income earner, you may want to take the exclusion on your 1st $105.9k.  Then use the foreign tax credit for anything above that amount.

Note: You can take this as an itemized deductions instead of a credit. But you should check to make sure it would be more beneficial than the credit.  No point in itemizing if it wouldn't be greater than the standard deduction.

To claim the foreign tax credit you will need to file Form 1116 (pdf).

Claim the Child Tax Credit 

This is another one of those credits which are available to expats.  If you have any children under the age of 17, you can claim this credit on your taxes.

For every child, you get a $2000 credit (as of this writing).  Be aware though that this credit starts to phase out if you make more than $200k ($400k for joint filing).

Complete the worksheet in Pub 972 to calculate your child tax credit.

Bonus Expat Tax Tips:  

• This kind of credit is available in most other countries as well!  So be sure to check in your country and see how you can take advantage of these additional savings!
• The CTC is partially refundable! See the additional child tax credit below!

Take the Credit for Other Dependents

Maybe you have children who are 17 and older or parents or relatives whom you are taking care of.  Well you are in luck, because there is another credit you can claim: The Credit for Other Dependents (ODC).

With the ODC, your dependents don't necessarily have to live with you but you must still be paying at least 50% of their expenses.  For each dependent, you will get a $500 credit.

Don't Forget About the Additional Child Tax Credit

Bonus point good news!  If you for any reason, are unable to claim all of your child tax credit, you can claim the additional child tax credit (which is the refundable portion of the CTC) for up to $1400 per child.

This means that you could potentially receive money from the IRS! Refundable credits make it so that your tax bill can be negative which means that the IRS owes you!  Expat Tax Tips for the WIN!

So don't forget to claim this if you can!  You will need to fill in Schedule 8812 (pdf) and attach to your tax return to claim.

Make Estimated Tax Payments

Many expats (really Americans in generally) are not aware that if you find that you owe the IRS money at the end of the tax year, you may have to start making estimated tax payments throughout the following year.

This may occur if you make more than you can exclude with the foreign income exclusion.

Failure to make the estimated payments could result in a large tax bill with lots of late fees, penalties, and interest piled on top.  

See Publication 505 for more information.

Establish an Address in a No Income Tax State

As an expat it is quite easy to forget about state income taxes.  But they still exist and you may still owe them even if you are no longer living in the state. 

Generally, you will owe taxes in the state of your last residence before you moved abroad.

Some states only tax certain kinds of income while other states have no income tax at all.

Therefore, you may want to consider establishing a tax home in a tax friendly state while you travel or live abroad.  To do so you will usually need a Drivers License in the state and a mailing address. 

Here are 7 states with no income tax:

Both Tennessee and New Hampshire get an honorable mention as these states only tax investment income.  So they may be worth looking into as well.

If you are able to establish residence in one of these states before you leave, that would be great.  But if not, you can use a service like Earthclassmail that can help you establish residence in one of the states above.

They also provide handy services like scanning your mail and sending it to you and depositing checks on your behalf.

Always Hire a Flat-Fee Based Tax Accountant

Dealing with international tax filings can be complicated and filling out all that paperwork can take hours upon hours.  And if you have a tax accountant that charges by the hour, this can lead to a gigantic tax bill if you are not careful.

So should you decide to go the route of hiring a tax professional make sure you hire them for a flat fee.  Never hire on an hourly basis as this can lead you to be hit with huge bill at the end of the tax season.

Also, maybe it goes without saying, but make sure you hire someone who is knowledgeable about international tax laws.  You definitely don't need them messing up your taxes and causing you problems with the IRS later on down the road. 

I can screw up my taxes just fine on my own thank you without paying a tax pro thousands of dollars to do so.

You Can Always Amend Your Taxes

If you have made mistake when filing your taxes, don't worry.  It is probably not the end of the world.  After all, you can always file an amended tax return, 1040-X.  

You will need to mail in the paper form to file and use the address in the instructions.  Should you need to do so for more than one year, file a 1040-X for each year in separate envelopes.

You are only allowed to claim refunds up to 3 years after you filed (2 years if you paid taxes).  If you find you owe more with the amended tax return, you should pay ASAP to limit the amount of interest and penalties.

You don't need to file though if it is simply for math mistakes made during some calculations as they will fix it for you.

Note: If you received notice from the IRS that you need to file an amended return, do not mail it to the address on the form but the one given in the notice. 

Use the Streamlined Foreign Offshore Procedure

If you were unaware of the fact that as an expat, you had to file FBAR, no worries.  The government has made it easy for you to catch up on your filings and not be penalized.  

Use the streamlined offshore filing procedures to once again become compliant with US tax law.  You may need to submit 6 years of FBAR as well as certain other informational returns such as the FATCA Form 8938.

All in All

Turns out the IRS may not be such of a big bad wolf after all as they have given us lots of different ways to save on our taxes.  By implementing these expat tax tips, you can save yourself thousands of dollars. 

Put these tips into action on your next return and let me know how it goes!  Also, if you have any other tax tips or tricks of your own, let me know in the comments below!