So you moved abroad — great! Every year, an estimated nine million Americans move to live or work abroad. Exploring another country and culture is a unique and unforgettable experience. However, even if you live abroad, you still need to pay US taxes. Filing taxes overseas can afford you certain deductions simply for living outside of the United States. To learn more about what you can deduct from your next tax forms, check out our list of the most common tax deductions for the world traveler.
1. Foreign Tax Credit
One of the most common tax deductions you’ll encounter is the Foreign Tax Credit. This is nonrefundable and works only if you paid taxes abroad. It depends on the percentage of total income from foreign countries. The reason for this is to reduce the chance of paying double taxes in both your host country and in the United States. If you only lived and worked abroad, even for an American company, all of your income for the year is foreign income. However, if you worked in the US for a few months during your time abroad, this does not count as foreign income.
2. Foreign Earned Income Exclusion
This is another common tax deduction for the world traveler. Foreign Earned Income Exclusion reduces your taxable income by excluding a maximum of roughly $100,000 from your taxes. You are eligible for the exclusion only if you were a resident of a foreign country for a full tax year, according to the “bona fide test” or if you have been in a foreign country for 330 days in a 12 month span that either started or ended during the tax year, according to the “physical presence test”.
3. Foreign Housing Exclusion
This one goes along with the Foreign Earned Income Exclusion. Foreign Housing Exclusion says that if your employer pays for reasonable housing expenses abroad, this may be excluded from your taxes for that part of the year. If you’re abroad and self-employed, this also counts as an income deduction. This deduction depends on what country you live in and whether or not you meet the other requirements of the foreign housing expenses, which include rent, utilities, personal property insurance, leasing fees, furniture rental, parking rental, and repairs. The Foreign Housing Exclusion also only applies to those who have already qualified for the Foreign Earned Income Exclusion.
4. Things to Watch Out For
Okay, this one isn’t technically a deduction, but there are some things you need to be aware of as an expat filling out US tax forms. If you have a bank account in your country of residence, outside of the US, you need to fill out the section called “Schedule B” in order to report interest and dividends from your foreign account. Another thing to watch out for is Earned Income Credit (EIC). As an expat, you cannot qualify for or claim EIC, even if you put down your US address on the forms. Earned Income Credit is for those who earn lower incomes within the US. Even if your income seems low when converted into US dollars, you should qualify for the Foreign Earned Income Exclusion, not the Earned Income Credit.