Expat Tax Changes for 2023 – IRS Updates
As a US expat living abroad, you already know that the tax code is continuously changing. So, it’s no surprise that expat tax changes in 2023 require a deep dive. That’s where we come in!
Although the 2023 tax season just opened (so, tax returns for 2022 are being filed this year), the IRS has already released information for next year’s tax season.
We’ve prepared the following so you can stay informed. Read on for a summary of the major changes for the 2023 tax year (which will impact the tax returns you’ll file in 2024, not this year).
Looking for a more holistic overview of how to navigate your US tax filing obligations as an American citizen or permanent resident? Take a look at our US Taxes for Expats Guide for a more comprehensive, big-picture view of your tax obligations while living abroad.
Foreign Earned Income Exclusion is increasing to $120,000
The Foreign Earned Income Exclusion (FEIE) is the amount of your foreign earned income the IRS permits expats to exclude from their taxable income. This exclusion applies to “earned income,” such as salaries and commissions. Unfortunately, it does not apply to passive income such as interest and dividends.
Every year, the IRS adjusts the FEIE to account for inflation.
American expats will be happy to know that for the calendar year 2023, for returns you’ll file in 2024, the IRS has increased the FEIE from $112,000 to $120,000.
This means you’ll be able to exclude up to $8,000 more of your income from tax compared to 2022 (when you filed your 2021 tax return).
Here’s how the FEIE has changed over the last three years.
Foreign Earned Income Exclusion Amounts
|Tax Year||Filing Year||FEIE Amount|
Standard Deduction is increasing
The standard deduction is the amount of your income that is tax-free. On account of inflation, the IRS generally adjusts the amount of standard deduction every year.
For tax returns you’ll file in 2024 related to the 2023 tax year, you’ll benefit from increased standard deduction amounts that you can claim.
Of course, the amount depends on your marital status, age, and whether you file jointly or individually.
Here’s what the standard deduction looks like for those who are under the age of 65.
Standard Deduction Amounts for Taxpayers Younger Than 65
|Tax Year||Single||Married Filing Jointly||Head of Household|
For those aged 65 or older, here’s what you should know about the changes in standard deduction rates.
Standard Deduction Amounts for Taxpayers 65 And Older
|Tax Year||Single||Married Filing Jointly||Head of Household|
Of course, there’s always the option of claiming itemized deductions instead of the standard deduction.
Before the Tax Cuts and Jobs Act of 2017, many expats preferred the itemized deductions route. At that time, the standard deduction for single filers was a mere $6,350. However, this amount doubled to $13,000 (for single filers) with the passing of the Tax Cuts and Jobs Act.
Data from the IRS for 2021 shows that about 90% of American taxpayers prefer to opt for the standard deduction instead of the itemized deductions.
Still, you will want to evaluate the two options and choose the one that will benefit you most.
Minimum filing thresholds can be different
While the figures are often similar, the standard deduction and minimum income thresholds required to file a tax return are two different things.
Generally, when your income is lower than your standard deduction, you will not need to file your tax returns. However, there is one major exception.
If you earn at least $5 and are married but filing as single, you’ll need to file your tax return. However, if you fit the aforementioned profile and you’re under the age of 65, your standard deduction will be $13,850, which is much higher than your tax filing threshold of five dollars.
While some people may seek to interpret their financial situation in a way that exempts them from needing to file, there are a few situations where filing a tax return may be beneficial to you.
For example: when you want to claim a tax refund.
Let’s use a hypothetical person, Emma, as an example. Say Emma is a US citizen and a single taxpayer below the age of 65 working in Sri Lanka. Let’s also assume that Emma’s annual income for 2022 was $10,000.
Here, Emma’s standard deduction for 2022 will be $12,950. This is more than her income.
However, if, say, $650 was withheld from her pay as federal income tax, the only way Emma will ever receive a refund of this amount is by filing her 2022 tax return.
The income thresholds within each tax bracket are going up
The US has seven income tax rates. These rates have income bands adjusted yearly to account for inflation. This means that every year, it’s important to review these bands to understand which income tax bracket corresponds with your income.
If your income hasn’t changed, it’s hard to find yourself in a higher tax bracket. Adjusting the income bands to neutralize the impact of inflation is almost always financially beneficial, not financially detrimental, to the taxpayer.
Here’s how the income bands have changed for single filers for the tax year 2023 for returns you’ll file in 2024.
Income Tax Rates, Single Filers
|Tax Rate||Tax Year 2023||Tax Year 2022|
|10%||$1 to $10,999||$1 to $10,275|
|12%||$11,000 to $44,725||$10,276 to $41,775|
|22%||$44,726 to $95,375||$41,776 to $89,075|
|24%||$95,376 to $182,100||$89,076 to $170,050|
|32%||$182,101 to $231,250||$170,051 to $215,950|
|35%||$231,251 to $578,125||$215,951 to $539,900|
|37%||More than $578,125||More than $539,900|
If you had an annual income of $90,000 in 2022, your marginal tax rate was 24%.
But if you maintain that income in the 2023 tax year, your marginal tax rate will be 22%.
In sum, the marginal tax rate is the tax rate at which your last dollar of income is taxed. And in this example, the IRS will tax your last dollar of income for the 2023 tax year at 22%.
The example we’ve highlighted here is for single filers. Check out the IRS website for the 2023 changes in the tax bands for other filers.
Gift tax exclusion going up in 2023
The gift tax exclusion amount for the 2023 tax year is increasing to $17,000. This should be exciting news because it’s an increase of $1,000 from the 2022 limit.
Here’s how this amount has been changing over the years:
Annual Gift Tax Exclusion
|Tax Year||Gift Tax Exclusion|
This means you can make a tax-free gift of up to $17,000 to anyone in 2023.
The maximum amount you can contribute to a retirement plan is increasing
As an expat, you should both learn about your retirement account options, as well as save up for your golden years. The good news is that the maximum contribution you can make will go up this year. However, the maximum contribution limit usually depends on your retirement vehicle, so it’s important to familiarize yourself with the options and choose the best one for you.
For 401(k), 403(b), and most 457 plans, the IRS has increased the maximum amount you can put in from $20,500 in 2022 to $22,500 in 2023.
On the flip side, $6,500 is the new maximum contribution limit for an IRA. This is $500 more than it was in 2022.
There have also been changes to the catch-up contributions. Catch-up contributions refer to the allowance for those 50 and older to continue to use IRS retirement vehicles such as the IRA to save more money.
For 401(k), 403(b), and most 457 plans, the IRS increased the maximum catch-up amount from $6,500 in 2022 to $7,500 in 2023.
This means that if you’re 50 and older, you can save up to $30,000 this year, up from $27,000. This is the regular contribution limit plus the catch-up contribution limit.
Unfortunately, the limit for catch-up contributions remains unchanged for IRAs at $1,000.
You can get tax credits for purchasing an electric vehicle in 2023
A headline-grabbing change in 2023 will allow Americans to benefit from clean vehicle tax credits of up to $7,500 if they buy certain electric cars thanks to The Inflation Reduction Act of 2022.
The new legislation has several restrictive provisions, including requiring that you primarily use the qualifying electric vehicle in the United States. Unfortunately, this aspect of the provision prevents most Americans living abroad from taking advantage of the change.
Americans are still eligible to claim stimulus payments in 2023
While two of the COVID-19-related stimulus payments required taxpayers to have filed their 2020 tax returns, and one required them to have filed their 2021 tax returns, the IRS usually gives individuals up to three years to file the relevant returns for which the claim for a refund is being made.
If you would like to claim your stimulus payments but are concerned about your eligibility because you are behind in your taxes, you may still be able to retroactively claim your stimulus payments, as well as any additional credits you might qualify for. For US taxpayers living abroad who have not filed previous returns, perhaps ever, or perhaps not for several years, the IRS created an amnesty program that you may benefit from called the Streamlined Compliance Procedures. The key provision you must satisfy in this program is the certification that your conduct was non-willful, although there are other provisions to keep in mind as well. For example, you must initiate the procedures prior to the IRS contacting you on account of missing tax information.
Child Tax Credits are changing in 2023
Unfortunately, several financial benefits arising from the COVID-19 pandemic have run their course in 2023. As a result, some tax provisions are dropping back to their lower, pre-pandemic levels.
These include the expanded provisions for the Child Tax Credit in 2021, which enhanced the credit to $3,600 for children under six and $3,000 for children six to 18. In 2023, the Child Tax Credit will go back to $2,000 per child under 17.
These updates may have little bearing on most US expats due to the fact that the provisions are unavailable to those who have not lived in the United States for over six months.
Read more about the Child Tax Credit for US Expat Parents.
Parsing IRS updates and understanding how they apply to expat tax changes in 2023 can be challenging
Bright!Tax was founded by expats, for expats, and has been applying their wealth of accounting knowledge to reduce tax bills and lower the stress associated with tax season for our clients for over ten years. If you’re looking for professional help to guide you through what can feel like a labyrinth of US tax code, you’ve come to the right place. Get started today by connecting with one of our experts today.