Living outside the US can both be challenging and fun. However, this is not something that would automatically absolve you from paying taxes, even if you have never been to the US for months or years. An average American living abroad can find it hard to file taxes, so if you are that person who has to deal with a foreign tax code, the entire experience can be quite mind-boggling.
Here are some of the best tips for filing taxes if you are living abroad.
1. Account For Your Every Income
When you are ready to file your US tax return, it is vital to understand that you will have to report your earnings throughout that year, even if you are talking about foreign money. In the United States, all forms of income are taxable, and you have to be as honest as possible with your earnings for that particular year.
In case you own a foreign account with assets worth at least $10,000, you will have to file a Foreign Bank Account Report, also known as FinCEN Report 114. Although it is possible to have your tax return filed on paper and delivered via email, you can never do that with FinCEN Report 114.
2. Make Use of Automatic Filing Extension
If you are a US citizen living abroad, you will automatically qualify for the tax filing extension. This is the one thing you can always take advantage of. This is one of the reasons why filing US taxes from abroad should not be a difficult tax. In case you are unable to file your tax return by April, you will have an extension until June.
Those in the US will have to file an extension to be allowed to file tax after April. However, if you are abroad, you don’t have to apply for an extension; it is given automatically. But if you need an extension of more than two months to file a tax return, you are required to fill form 4868.
3. File Your Tax in April
Even if you don’t intend to file your taxes by October or June, you need to pay any taxes you owe by April. If you fail to do this, you should be ready to interest and a penalty on top of the unpaid taxes. Be sure to estimate your tax bill ahead of time to know what you are expected to pay.
Those who fail to pay their taxes on time will pay a penalty of 0.5% of the unpaid amount for each month, up to 25%. These are challenges you can avoid by getting things done every year.
4. Use Ideal Exchange Rate
Once you are done filling your tax return, you are expected to report your income in US dollars. In this case, accuracy is the most important thing to take care of. If this is going to be your first time using exchange rates, you want to choose the best one.
In case of any business transactions that were completed on various dates, you must use the exchange rate on those days. In case you received some foreign funds within that period, be sure to leverage the yearly average exchange rate to convert to dollars.
5. Avoid Double Taxation
As a US citizen living in a foreign country, there are things you should know about filing a tax return. For instance, you should not have your income taxed by the country you live in and the US.
You can always claim your Foreign Tax Credit for part or all of your foreign income taxes paid by filing Form 1116. Also, it is possible to deduct your foreign earnings by the time you itemize your deductions. Besides asking for the Foreign Tax credit, US citizens have the alternative of taking the Foreign Earned Income Exclusion.
Closing Thoughts
We hope this post helps you learn how to file your tax return as a US citizen living and working in a foreign country. If you fail to file your tax return within or before the deadline, you risk being penalized. When reporting your income for the year, make sure to use the ideal exchange rate to achieve the required accuracy. Do you still have any questions about filing a tax return? Do let us know in the comments.
