The IRS Standard Deduction in 2021 for Expats
The IRS Standard Deduction allows Americans to deduct a fixed amount of their income from US tax when they file their federal return.
The Standard Deduction lets Americans avoid the hassle of itemizing their actual deductions when they file. The amount of the Standard Deduction was very low before the 2017 Tax Cuts and Jobs Act, so it was rarely used. Since it was increased in the Act though, 90% of Americans now claim it rather than itemize their deductions.
The Standard Deduction amount is set by the IRS and is increased each year to reflect inflation.
2021 IRS Standard Deduction Amounts
Americans filing in 2021 will use the Standard Deduction Amounts for the 2020 tax year.
The amount of the standard deduction depends on the filer’s filing status
For the 2020 tax year, the Standard Deduction for single Americans, and for married Americans filing separately, it is $12,400. For married Americans filing jointly it is $24,800, and for those filing as Head of Household, it’s $18,650.
For tax year 2021 (so for filing in 2022 tax season), the Standard Deduction will increase to $12,550 for single Americans and those married filing separately, $25,100 for married Americans filing jointly, and $18,800 for Heads of Household.
Should expats claim the Standard Deduction?
Americans living abroad have to file a US federal tax return because the US taxes based on citizenship, rather than on residence the way most other countries do.
“Before the tax reform law, about two-thirds of all taxpayers claimed the standard deduction. That jumped to almost 90% for the 2018 tax year, which was the first year for the enhanced standard deduction.” – Kiplinger
The Foreign Tax Credit lets expats claim US tax credits up to the value of foreign income taxes they have paid in a foreign country. If they live in a country with higher foreign tax rates than the US, claiming the Foreign Tax Credit by filing IRS Form 1116 eliminates their US tax bill.
Alternatively, expats can claim the Foreign Earned Income Exclusion, on IRS Form 2555, which lets them exclude the first $107,600 of their earned income from US tax. This means that most expats who don’t pay foreign income taxes can eliminate their US tax bill too, although it is important to note that the Foreign Earned Income Exclusion only relates to “earned” income, and that the expat claiming has to meet IRS definitions of living abroad.
Claiming one of these two provisions is a great way for expats to eliminate their tax liability. However, if, for some reason they do owe tax, expats also have the right to claim the Standard Deduction in 2021.
Expats benefit from seeking advice
Filing from abroad is different compared to filing in the US. Not only do expats have to file additional forms to reduce their US tax bill, they also often have to deal with currency conversions if they have foreign currency income, and additional filing requirements, such as FBAR filing.
FBAR filing is required for any Americans who have over $10,000 in total at any time in the year in their combined foreign registered financial accounts, including bank, investment, and individual pension accounts, and even business accounts not registered in their name. Expats have to report their foreign business interests, and sometimes financial assets separately, too.
It is beneficial for the vast majority of expats to seek advice from an expat tax specialist, rather than rely on a US based accountant or a software, neither of which can offer advice to allow expats to file in their best interests.
Americans who have been living abroad unaware that they had to file a US federal tax return can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure.