Expat Taxes: Here’s How You Can Save BIG (The Complete Guide)

Looking for ways to save money on your expat taxes?  Well, you've come to the right place.  There are plenty of credits, deductions, and exclusion available to us expats and it's high time we start taking advantage of them. 

No one likes filing their taxes but if there is one thing we all look forward to, its that refund that you know will be coming in the mail soon after.  As an expat, you may not realize this but you too can get a refund.  

Right?! Who would've thought!

In this guide, we will go over all the credits, deductions, and exclusions available to help you save money on your expat taxes.  With them, you can reduce your taxable income, save on taxes, and hopefully get some money back!

So without further ado... let's get started!

How you can save money on your expat taxes

When filing your taxes as an expat, there are three main ways that you can reduce or eliminate the taxes you are required to pay in the US: The Foreign Earned Income Exclusion, The Foreign Housing Exclusion, and the Foreign Tax Credit. 

Additionally, for expats with dependents, you may also be able to avail yourself of the Child Tax Credit which is a partially refundable credit that could help you save big and get you a refund.

The Foreign Earned Income Exclusion (FEIE)

As an expat, you can have some, if not all, of your foreign earned income excluded from US taxes.  This is done so that you are not taxed twice on the same income.  The FEIE is the biggest way you can save money on your expat taxes.

To claim this exclusion, you must file Form 2555 with your 1040 tax form. You can only claim this if your tax home is in a foreign country and you pass either the bonafide residence or the physical presence test.  

By taking this exclusion, you can exclude up to $105,900 of your foreign earned income (for the 2019 tax year).  Any amount over this, will be taxed at the tax rate of your entire income (even the excluded bit).  

See the Instructions (pdf) for the 1040 or 1040-SR to calculate the tax on the non-excluded portion. 

While the FEIE, provides you with some great benefits, there is a catch.  The catch here is that if you elect to exclude your foreign income you are no longer able to take the following credits and deductions:

Passing the Test

The Bonafide Resident Test

To meet this test you must be a resident of a foreign country for a full, uninterrupted tax year (i.e. Jan 1st - Dec 31st).  Of course, you may leave the country on temporary trips but your intent must be to return to the foreign country.

You must be a US citizen or a US resident alien from a country that has a tax treaty with the US to use this test. Typically, new expats start out by meeting the physical presence test.  Then after they are fully settled in the country, they are able to claim the bonafide residence.

The Physical Presence Test

To pass this test you must be in the foreign country for 330 full days in a year.  These days do not have to be consecutive but you will need to make note of when you travel and the dates you return.  Write this on the 2555 form.

The Foreign Housing Exclusion

This deduction, like the FEIE, is designed to help you reduce your taxable income by taking into account your housing expenses while living abroad.  With this, you can deduct your rent, utilities, property insurance, and more.

Who Qualifies?

In order to take the foreign housing exclusion, you must first qualify for and take the foreign earned income exclusion.  If you choose not to claim FEIE, you cannot deduct your housing expenses.

Also, your housing deduction cannot exceed your foreign earned income and the income received by your employer must be used to pay for the expenses. 

Furthermore, only expats in certain countries and whose housing expenses or greater than the base amount can take this exclusion.  

The base amount is 16% of your FEIE.  So, first, you will need to check and make sure your expenses are greater than 16% of your excluded foreign earned income.  Any amount over this basis can be used to reduce your taxable income.

Housing Deduction Cap

There is a limit to how much of a deduction you can take however.  And that is based on your location.  Some locales are more expensive than others and so will have a higher limit.  

See the instructions for Form 2555 (pdf) for the breakdown of cities and their limits.  For all my fellow expats in Japan, you'll be happy to note that Tokyo, Japan tops the list.  Not surprising.

What Housing Expenses Qualify?

Here's a list of the expenses you are allowed to exclude:

*If you have a second foreign home for your family because you currently live in a dangerous location, the expenses for that can also be included.

What Doesn't Qualify?

Sadly, mortgage payments do not qualify.  Neither do maids or housekeeping, furniture or things purchased, and generally anything the IRS would deem "luxurious" or "extravagant".

Like with the FEIE, should you choose to claim this deduction, you won't be able to claim the other tax credits and deductions listed above.

Things to Note:

• If you are self-employed, your housing expenses can't be excluded.  Instead it becomes a deduction that you take that lowers your taxable income.
  •  Also, if you are taking the home office deduction, you must separate this from your housing deduction.  And both combined should equal your total housing expenses.
  • Further, these deductions do not reduce your self-employment taxes.
• If you are married, only one of you can claim the housing exclusion even when figuring your expenses jointly.  Should you be living 'unreasonably' far apart, you both may be able take the exclusion.
• If you have foreign housing expenses from different countries (because you moved), then you need to calculate them separately as they will have different limitations.

The Foreign Tax Credit

Another way to save money on your expat taxes is through the foreign tax credit.  This benefit is open to anyone who paid taxes to a foreign country (or US possession) and is also required to pay US taxes on the same income.  You can take it as a credit or an itemized deduction.

A credit is tax benefit that reduces how much taxes you owe while a deduction reduces your taxable income.  For the most part, a tax credit is the better option.  

Not to mention, unless your itemized deductions are greater than the standard deduction ($12,200 as of 2019), there is no point itemizing.  But do check to see if the foreign tax rate is higher than the US rate.  Because then it may be better to itemize.

Note:  Some foreign countries are not eligible for the credit so you may have to take the deduction.

Should you not be able to exclude all of your foreign earned income, use this to get a credit on the non-excluded portion.  With the foreign tax credit, you can carry back the excess one year or carry it forward for up to ten years.

p.s. Don't mess around and try to cheat the system and take both.  Your right to take either may be revoked.

For Expats Living in France

In 2019, the US government made an agreement with France to treat Contribution Sociale Generalisee (CSG) and Contribution au Remboursement de la Dette Sociale(CRDS) taxes as regular taxes and not Social Security taxes.  This means that if you paid these taxes in the past you are able to file an amended return and claim the foreign tax credit.

Individuals, estates, or trusts must file Form 1116 to claim the foreign tax credit.  If you choose to take it as a deduction, you would write it in on Schedule A of the 1040 form.  Typically, you cannot take both the credit and the deduction.

The Child Tax Credit

If you have children under 17, then this tax credit is for you.  This is one of the few tax credits you can take when filing taxes as an expat.  

In addition, there tends to be similar credits available in many countries. So you may be able to use it in your current country to reduce your foreign taxes as well.

The Additional Child Tax Credit (ACTC)

If you do not receive the full credit for the CTC because you don't owe that much in taxes etc., you can claim the additional child tax credit (ACTC) which is a refundable credit and is now $1400 per qualifying child.

So, essentially, the ACTC is the refundable part of the CTC.  This means you can receive $1400 per child back from the IRS even if you do not owe them taxes.  

However, you must have at least $2500 of earned income and you cannot take the foreign earned income exclusion if you want to claim the ACTC.

Furthermore, there is a cap to how much of a refund you receive.  It cannot be more than 15% of your earned income.  So for every $1400 you will need about $12k in income.

There is also another credit called Credit for Other Dependents (ODC).  This is for those who do not fall under the CTC (i.e. dependents who are 17 or older).  You may claim up to $500 for each eligible dependent.

To claim the CTC, you must have a valid Social Security Number for each child you wish to claim.  Publication 972 has worksheets you can use to calculate your CTC.  Also, if you need to calculate and claim your ACTC, complete Schedule 8812.

Going the Itemized Deduction Route

Generally speaking, many of us will simply take the standard deduction instead of going the itemized route since the standard is extremely high at the moment.

However, there are some instances where itemizing will be more beneficial to you than taking the standard deduction.  So, just in case, let's take a quick look at how to take these deductions and where to include them in your tax return.

Here are the types of expenses that can be deducted on Schedule A:

All in All

Filing taxes as an expat can be stressful.  Especially if you are worried about having the extra tax burden.  Luckily, there are many ways that you can save money on your expat taxes and reduce this burden.

These laws were put into the tax code for a reason.  Take advantage of them and spread the word!  Let your friends know so that they too can save big!  Happy Filing!