US expats are required to file a US federal tax return in order to disclose their worldwide income. If you’re a US expat who lives in a low-tax country and earns above the Foreign Earned Income Exclusion threshold, you are likely to owe US tax.
There are a number of methods you can use in order to minimize- or even eliminate, the tax you owe.
Below are a few strategies we consider when advising clients on how you may be able to reduce your U.S. tax bill.
By changing your filing status by some of the methods mentioned below you can become eligible for certain deductions not available to other taxpayers.
1) Make an election to file jointly
If you’re married to a non-resident alien spouse, you may consider making an election to file jointly and report your spouse’s income on your joint tax return to reduce the tax bill.
By treating your Non-Resident Alien spouse as a US citizen for tax purposes and adding them to your tax return you will be classed as ‘Married Filing Jointly’, rather than ‘Married Filing Separately’. This means that your standard deductions capacity will double and adds a personal exemption for a spouse of almost $4,000.
2) Taking personal exemption for your higher earning non-resident spouse
If your spouse earns $120,000 or more, adding their income to your return will increase your combined taxable incomes. By applying for an ITIN for your spouse, you will be able to claim a personal exemption. You can do this if you are expat at any income level, provided that your spouse doesn’t have income from U.S. sources.
3) Claim children as dependents
If you have a child that has been born abroad, they are likely to qualify for a U.S Social Security number. By claiming your child as a dependent you will upgrade your filing status to ‘Head of Household’. This will mean that you can take a personal exemption of $4,000 for each child and may qualify for other benefits, such as child credit and dependent care credit.
4) Eliminate self-employment tax
Self-employed taxpayers in countries without a Social Security Totalization Agreement can incorporate their sole proprietorship in order to become regarded as an employee. This will mean that the individual is no longer subject to U.S. Social Security Tax
5) Rent rather than own
Rent can be excluded from earned income on top of the foreign earned income exclusion. Depending on the cost of rent in the country you are residing, this can result in a significant deduction.
Mortgage interest can also be deducted. However, it yields a much lower tax saving than the housing exclusion.