Get to know the authorLiving abroad can add a significant degree of complexity to US taxes — and it’s not uncommon for overwhelmed expats to put them off until the last minute.
If there’s one thing you don’t want to procrastinate on, though, it’s your taxes. Rushing through your tax return to meet a fast-approaching deadline can lead to errors, missing forms, and a higher tax bill than necessary. Proactive tax planning, on the other hand, helps ensure an accurate, fully compliant, and optimized return.
But what exactly is tax planning, and what does it involve? Below, we’ll address those questions, share the benefits of tax planning, and discuss tax planning strategies.
Expat tax obligations: What you need to know
Before we get into tax planning itself, let’s take a step back and talk about US expats’ taxreporting obligations.
First things first: All American citizens and permanent residents who earn above a certain threshold must file a tax return, even if they live outside the US.
Expats receive an automatic two-month tax extension, so their returns aren’t due until June 15th. This can be extended even further to October 15th upon request. However, you still owe an estimated tax payment on April 15th. Failing to file or pay on time — or committing certain filing errors — can incur significant penalties, which we’ll discuss more below.
Note:
If any of these days fall on a weekend, the deadline will move to the next business day.
What is tax planning?
Tax planning refers to the process of proactively coming up with a tax strategy that minimizes your tax burden (while still meeting all rules and requirements, of course).
To come up with a strategy, you have to analyze your finances and possess a thorough knowledge of US tax law to ensure everything works in harmony. As a result, it’s usually best to partner with a tax professional.
The importance of proactive tax planning
So, if you wonder how some people seem to breeze through tax season while others scramble, know that the secret lies in proactive tax planning, a savvy approach that can save you money and headaches down the road.
By thinking ahead and making smart moves throughout the year, you can take control of your tax situation and keep more of your hard-earned cash in your pocket.
Here’s what you can achieve thanks to proactive tax planning:
Avoid penalties & interest
Proactive tax planning with a professional makes you much less likely to file late, underpay, or make a mistake when completing a form. Any of these actions can lead to financial penalties, including the:
- Failure to file penalty: 5% per month up to 25%
- Failure to pay penalty: .5% per month up to 15%
- Underpayment penalty: Varies according to amount underpaid and quarterly interest rates
- Accuracy-related penalty: 10% or $5,000 (whichever’s greater)
- Erroneous claim for credit or refund: 20%
If you’ve already fallen behind on taxes, a tax planner can also help you take advantage of an IRS amnesty program like the Streamlined Foreign Offshore Procedures or the Delinquent FBAR Procedures. Programs like these can help you reduce or even avoid penalties associated with late filing.
Reduce stress & uncertainty
US taxes are complicated as it is — add the complexities of living abroad, and they can be even more challenging. Trying to navigate an expat return on your own can be overwhelming, especially if you’re filing close to the deadline (as many taxpayers do).
Working with a tax planning professional can result in a much smoother process. Not to mention, you’ll save a lot of time with a tax professional doing the heavy lifting.
With a deep understanding of US tax laws, tax planners can help you figure out your tax and reporting obligations, reduce your overall bill, and file your return for you.
Optimize tax deductions & credits
Tax deductions and credits play a crucial role in minimizing your tax liability, but few people know the extent of tax breaks available. A tax planning professional will know which tax breaks you qualify for and would benefit you the most.
Tax planners with dedicated backgrounds in US expat taxes can help you navigate tax benefits specific to Americans abroad, such as the:
- Foreign Tax Credit (FTC): Receive dollar-for-dollar US tax credits for any foreign income taxes you’ve paid. You can apply credits to your current tax bill or future bills up to 10 years
- Foreign Earned Income Exclusion (FEIE): Exclude a certain amount of foreign earned income from taxation — up to $120,000 in tax year 2023, and up to $126,500 in tax year 2024
Applying the right tax breaks to the right income can help you drastically cut down your US tax bill, if not eliminate it altogether.
Reach (& maintain) full compliance
Beyond your main tax return form (usually Form 1040), there are usually other schedules, forms, and reports you must file based on your financial situation.
For example, there are mandatory forms for reporting ownership in a foreign corporation, certain foreign gifts, and passive income from a foreign mutual fund.
Two of the most commonly required reports for expats include the:
- Foreign Bank Account Report (FinCEN 114): Used to disclose the contents of foreign financial accounts when total holdings overseas exceed $10,000
- Statement of Specified Foreign Assets (Form 8938): Used to disclose foreign assets when the value exceeds $200,000 on the last day of — or more than $300,000 at any time during — the tax year
- Note: Thresholds vary based on filing status and location of residence.
The items mentioned above are far from a comprehensive list. And failing to file a mandatory form, schedule, and report can come with a hefty penalty — in some cases, $10,000 per instance with additional fees for delays.
A tax planning professional will know exactly which documents you must submit with your tax return, ensuring you stay in good standing with the IRS.
Minimize capital gains taxes
Tax planning is particularly essential for those with significant assets who are considering selling them. Tax planners may be able to help you reduce capital gains taxes by:
- Advising you when to sell: Timing the sale of assets can have a major impact on your tax bill. Depending on when you sell your assets, you may be able to qualify for the more favorable long-term capital gains tax rates or avoid moving up a tax bracket
- Tax-loss harvesting: In some circumstances, you may be able to offset capital losses from capital gains to reduce your taxable capital gains income
In any case, a tax planner will be able to advise you on the wisest move from a tax perspective.
Plan for retirement
A tax planner can advise you on the most tax-efficient ways of saving for retirement, withdrawing savings from your retirement plans, reducing your taxable income, and factoring retirement accounts into your estate plans.
Working with someone who has an expat tax background is especially important here, as Americans abroad must consider things like:
- Whether they can contribute to a US tax-advantaged account
- How the US will tax their foreign retirement income
- Which US reporting obligations their foreign retirement income is subject to
Improve overall financial health
Just about every financial decision has tax implications. A tax planner will be able to take a detailed look at every aspect of your finances and how they interact with one another to come up with a solid, comprehensive tax strategy.
With the right tax strategy, you’re better equipped to reach your financial goals, whether that means buying a home, starting a family, or growing your business.
Tips for working with a tax planner
If you’re interested in working with a tax planner, keeping the following considerations in mind to ensure a smooth, effective tax planning process:
- Keep detailed records: To best serve you, your tax planner needs accurate, detailed information on your finances. Make sure that you have bank statements, business expenses, foreign tax documents, asset appraisals, financial transaction records, and anything else your tax planner might need.
- Credentials matter: Only licensed tax professionals have the knowledge and experience necessary to make recommendations. In particular, you’ll want to find someone with a Certified Public Accountant (CPA) designation, as they tend to be familiar with business and finance.
- Look for expat experience: As we’ve mentioned, living abroad adds a whole new dimension to your taxes. Tax planners who aren’t as familiar with the nuances of expat taxes may not be as well-equipped to develop a tax strategy for you.
- Start sooner rather than later: While tax planners can optimize returns at the end of the tax year, it’s just as valuable to ask for forward-looking advice at the beginning of the year. Plus, the closer you get to a tax deadline, the busier tax professionals will be.
- Don’t be afraid to check in: Your tax planner’s role is to help you, so you shouldn’t feel shy about asking questions, sharing updates, or requesting a meeting if needed.
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