What’s New for Expats Filing Their 2023 Tax Returns
Published on October 4, 2023
by Aya Takriti, EA
Aya Takriti, an IRS Enrolled Agent with 9 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in the Middle East. Aya speaks fluent Arabic and English and the odd word of German and Spanish if you catch her on a good day.
Table of Contents
Filing Extensions for Expats
First off, let’s talk about deadlines. You might ask, “Do I get extra time to file my taxes because I’m overseas?” The answer is yes. However, it’s important to note that the penalties for late filing have also been revised. Currently, it’s increased to a minimum of $450.
How do you go about getting this extension? You’ll need to file Form 4868. But remember, this form doesn’t extend the time you have to pay your taxes, just the time to file.
Foreign Earned Income Exclusion (FEIE) Updates
You’re probably wondering, “What’s the FEIE limit this year?” Good news! The FEIE limit has been bumped up to $120,000 for 2023. This means you can exclude more of your foreign-earned income from U.S. taxation. However, the criteria to qualify for the FEIE have been tightened. You’ll want to double-check to make sure you still meet the requirements.
The requirements mean that you’ll need to pass either the Bona Fide Residence Test or the Physical Presence Test. And this year, the IRS is getting stricter about what counts as a “tax home” in a foreign country.
Feeling overwhelmed? You’re not alone. Tax laws are complicated, and when you’re juggling life in two countries, it gets even trickier. That’s why consulting a tax professional can be a game-changer.
Foreign Housing Exclusion and Deduction
What about your housing costs? Can you get some tax relief there? Absolutely! You can achieve it through the Foreign Housing Exclusion and Deduction.
First, what’s this “base housing amount” everyone keeps talking about? Simply put, it’s a figure set by the IRS that you’ll subtract from your total annual foreign housing expenses. For 2023, that magic number is $19,200. Why is this important? Well, it helps you calculate your “foreign housing amount,” which you’ll use for tax calculations.
How does the math work? It’s pretty straightforward. Take your total foreign housing expenses for the year and subtract the base housing amount. Here’s how it looks:
[Foreign Housing Amount] = [Total Foreign Housing Expenses for the Year] – [Base Housing Amount]
For instance, let’s say you’ve spent $30,000 this year on housing. According to this formula, your foreign housing amount would be:
$30,000 – $19,200 = $10,800
Your foreign housing amount for the year would be $10,800. This is the portion of your housing expenses that exceeds the base amount, and it’s what you’ll use for tax calculations or other financial assessments.
It’s also important to take note that some countries may have higher or lower limitations due to variations in the cost of living and other factors. See table here.
And here’s the important aspect, how do you actually claim these benefits? You’ll need to file Form 2555 or 2555-EZ with your tax return. These forms help you claim the Foreign Earned Income Exclusion and the Foreign Housing Exclusion or Deduction. It’s crucial to fill these out accurately to maximize your benefits.
It can feel complicated, especially if it’s your first time. That’s where a tax professional comes in handy. They can guide you through IRS forms, help you understand the latest updates, and even offer strategies to minimize your tax liability.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
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Foreign Trust Filing Deadline
If you’re involved with foreign trusts, you must file Form 3520-A by the March 15, 2024, deadline. Why is this date so crucial? That’s because missing this deadline can result in some hefty penalties.
You could face a financial penalty of up to $10,000 for failing to file on time. And if that doesn’t get your attention, the IRS can impose additional penalties of $10,000 for every 30 days that you’re late after receiving a formal notice.
The best way to avoid this is to file your forms on time, and if you need clarification on the process, feel free to seek professional advice.
Tax Day
Tax Day for the year 2023 is April 15, 2024. What should you be doing to prepare? It’s best to start by gathering all your financial documents. This includes W-2s, 1099s, and any other income-related forms. Also, don’t forget about any foreign income you’ve earned; that’s crucial too.
But what if you’re swamped and can’t get everything together by April 15? Don’t panic. You can file for an extension, but make sure you do it before the deadline hits. However, it’s important to remember that an extension gives you more time to file, not to pay your taxes.
You might be wondering, “What about state taxes?” Good question. If you’re a resident of a state that imposes income tax, you’ll need to file a state return as well. Each state has its own set of rules and deadlines, so make sure to check those out.
Tax Day for U.S. Citizens Abroad
While your friends and family back in the States have to file by April 15, expats get a little extra time. The deadline for those away from the states is June 17, 2024. But why the extension? It’s because the IRS understands that living abroad can complicate tax matters, so they give a bit more time to help their fellow Americans abroad.
You’ve got options when you’re filing from another country. You can file electronically, which is the quickest way to get it done. Alternatively, you can mail your tax return to the IRS. Just make sure it’s postmarked by the June 17 deadline to avoid any late fees. And remember, even if you don’t owe any taxes, you still have to file a return.
Reporting Foreign Financial Accounts
You might wonder, “Do I need to report my overseas accounts?” The short answer is yes. What forms should you be looking at? The usual suspects are FBAR (Report of Foreign Bank and Financial Accounts) and Form 8938 (Statement of Specified Foreign Financial Assets).
Foreign Bank Account Report (FBAR) Filing Deadline
If you’ve spent more than $10,000 across foreign financial accounts at any point during the year, you must file an FBAR. The deadline for this is October 15, and yes, that comes with an automatic 6-month extension.
What exactly counts as a foreign financial account? It’s not just bank accounts; it includes things like mutual funds, brokerage accounts, and even some types of pension plans. To file an FBAR, you’ll need to use FinCEN Form 114, which is separate from your tax return and must be filed electronically.
“What happens if I don’t file?” Well, you want to avoid finding out. The penalties can be severe, ranging from hefty fines to criminal charges. So, it’s best to be compliant.
Taxes are complex, especially when you’re handling responsibilities in two countries. That’s why it’s a smart move to consult a tax professional. They can help you with forms, deadlines, and regulations while ensuring you’re taking advantage of any benefits available to you.
Last Day to Claim 2020 Covid Stimulus Payments
If you haven’t claimed your 2020 Covid Stimulus Payments yet, time is ticking. The last day to claim is May 17, 2024. Are you eligible? Generally, U.S. citizens living abroad who have a Social Security number and meet the income requirements can claim it. If you haven’t claimed yours yet, you’ll need to file a 2020 tax return to get those funds.
Additional Child Tax Credit Refund
If you have kids, then you’ll want to know about the Additional Child Tax Credit Refund. It could significantly impact your tax situation. For each qualifying child, you could get up to $2,000, with $1,500 of that being refundable.
Who’s eligible? You’ll need to meet certain income thresholds and have a child under 17 who has lived with you for more than half the year.
Tax Treaty Revisions
You might ask, “What’s a tax treaty and why should I care?” Tax treaties can affect how much you owe the IRS, especially if you’re earning income in another country. The U.S. has these agreements with many countries to avoid double taxation. But here’s the thing: some of these treaties have been updated for 2023.
How do you find out if these changes affect you? You’ll need to do a bit of research. We recommend checking out the IRS website or the U.S. Department of State’s list of treaties. Once you identify the treaty that applies to you, read through it to see if any revisions impact your tax situation.
Feeling a bit overwhelmed by reading the fine print? That’s normal. This is where a tax professional can swoop in to save the day. They can help you understand treaty changes and offer strategies to minimize tax liability.
Tax Optimization Strategies for Expats
You want to ensure you’re taking advantage of all the deductions and credits available. Did you know you can claim foreign tax credits if you’ve paid taxes in your host country? Yes, it’s a thing. And remember the Foreign Earned Income Exclusion (FEIE) if you qualify. These can be game-changers in reducing your U.S. tax liability.
But wait, there’s more! Have you considered contributing to a U.S.-based retirement account? Contributions to IRAs or 401(k)s can be deducted, offering another avenue to lower your taxable income.
Why Consider Hiring a Tax Professional
Taxes are complicated. Even more so when you’re living abroad. Have you ever thought about hiring a tax professional? It’s not just about filling out forms; it’s about understanding your unique situation. Tax professionals can guide you through the complexities of expat taxation, from foreign-earned income to tax treaties and beyond.
What are the benefits, you ask? A certified tax professional can help you navigate IRS forms and requirements. They can identify which deductions and credits you’re eligible for, potentially saving you a significant amount of money. Plus, they can help you understand the impact of any new tax laws or treaty changes that might affect you in 2023.
But it doesn’t stop there. Tax professionals can also assist with more complex issues, like foreign asset reporting. Forms like FBAR and Form 8938 might be necessary, and non-compliance penalties can be steep.
And let’s remember tax planning. Are you taking advantage of all the available strategies to minimize your tax liability? A tax professional can help you plan for the future, offering advice on everything from retirement contributions to investment strategies tailored for expats.
So, is it worth it? The short answer is yes. While there’s a cost involved, the peace of mind and potential savings can far outweigh the expense.
The information provided herein is for general informational purposes only and should not be considered professional advice. While we aim to provide helpful and accurate information, we make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained here or linked to from this material.
Always get professional advice from a US international tax specialist.
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