US Expat Taxes: Year-end Planning Checklist

hourglass and US dollars, its time to plan year-end US expat taxes

Aargh! It’s time to start thinking about taxes again. 

The end of the year should be a period of celebration – popping off the champagne cork and ringing in a new year. But for US expats, the end of the year often comes with apprehension and a lot of anxiety. 

While filing taxes should be a breeze, for an expat, it’s not. Usually, you find yourself in the crosshairs of two countries, each with its own set of complex requirements that takes decades to understand or navigate.

But don’t despair just yet…

In this article, we’ll walk you through a tax planning checklist to ready you for the US end-of-year tax filing. 

📅 Count your days

To confirm your residency and, subsequently, whether you can benefit from the Foreign Earned Income Exclusion (FEIE), you’ll have to verify the number of days you actually resided in a foreign country. 

Read more: The Nuts and Bolts of the FEIE

There are two pathways you can use to prove residency to claim the FEIE: 

  • the Physical Presence Test or 
  • the Bona Fide Residence Test

Unless you intend to pursue the Bona Fide Residence Test because you’ve lived in a foreign country for an entire tax year and are a resident there (own or rent a home, pay foreign taxes, have a residency permit, etc…), your best pathway for ascertaining residency and proving eligibility for the FEIE is the Physical Presence Test.  

Read more: The Bona Fide Residence Test

That being the case, according to the Physical Presence Test, you only qualify for the FEIE if you’ve been physically present in a foreign country, or several foreign countries, for a minimum of 330 full days in a twelve-month period.

Read more: The Physical Presence Test

Counting your foreign residency days is crucial, and it’s the first step in preparing for filing your end-of-year tax returns.

And just so you know what’s at stake, the FEIE for 2022 is $112,000 and jumps to $120,000 in 2023. 

📚 Organize your paperwork

Waiting till the last minute to start organizing your tax paperwork is a surefire way of 🔼 your stress. 

Getting organized is not something you probably enjoy. But it will lessen the likelihood of receiving multiple “Outstanding Items” emails from your CPA or pulling an all-nighter to avoid missing a filing deadline.

Because all-nighters are for college kids studying for final exams, and you want to stay in the good graces of your CPA, you should start organizing your paperwork now. 

The paperwork you’ll need to have ready includes:

  • Your personal information, 
  • Details regarding your dependents, and 
  • Copies of tax forms you’ve received

Paperwork regarding your personal information

You’ll want to make sure you have your:

  • US and non-US addresses
  • Full name (exactly as it appears on your Social Security card)
  • Social Security number
  • Date of birth
  • Bank account and routing number (if you’re expecting a refund)

Information about your dependents

If you’re living with a dependent and you want to claim them for tax purposes, you should also have their information handy. 

For perspective, a dependent can qualify you for certain deductions and tax credits to help reduce your tax bill. So, this is something you’ll definitely want to consider.

🚩 Be aware that your child will always have to file a tax return with the IRS –even though they may never live in the US or consider themselves American.

Read more: Accidental Americans and Dual Citizenship

To claim dependents, the items you should have ready include:

  • Name of dependent — as it appears on their Social Security card
  • Dependent’s Social Security Number or Individual Tax Identification Number
  • Dependent’s date of birth

Dependent Social Security Numbers

🛑 Expats who had children born in 2022: You must have a valid identification number for your new child by the due date of the tax return to claim them as a dependent. 

For clarity, a valid identification number can either be a Social Security Number or an Individual Tax Identification Number.

❗ It’s also worth noting: Even if your child later gets an ID number, you can’t file an amended return for a previous tax year to claim a tax credit if the child didn’t have an identification number before the due date of the return.

Let’s use an example to illustrate this scenario.

Suppose your child was born on November 16, 2022. They will need a Social Security Number by October 15, 2023 (the extended tax deadline), for you to claim them on your 2022 tax return.  

But if the Social Security Number is issued on October 18, 2023, and you filed your 2022 tax return on October 15, 2023, you won’t be able to amend your 2022 return to claim any tax credits that the new child qualified for. Instead, you’ll have to wait to claim them on your 2023 tax return. 

That’s why you should prioritize obtaining a new child’s Social Security Number. Fortunately, according to the Social Security Administration, the average processing time of a Social Security Number application is just two weeks.

Copies of tax forms you’ve received

In addition to the previous year’s state and federal tax forms, some of the forms you’ll want to have ready include:

  • W-2s from your employer(s)
  • All your 1099 forms
  • Schedule K-1 (if you’re a small business owner)

Keep a good record (including summaries) of your income and expenses

To get ready for filing your end-of-year tax returns, you’ll want to keep a detailed record of your income and expenses. 

And for income, you should summarize them according to their various sources, such as:

  • Wages 
  • Freelance earnings 
  • Interest/dividends from investments 
  • Rental income 
  • Crypto transactions

Of course, these are just examples and do not cover the whole range of income sources out there. 

Your CPA will need this information broken out if you claim the Foreign Tax Credit using Form 1116. 

For your expenses, summarize your foreign housing expenses, including rent and utilities. This will come in handy when claiming Foreign Housing Exclusion, especially for expats who qualify for Foreign Earned Income Exemption (FEIE). 

While only certain types of housing expenses will qualify for the Foreign Housing Exclusion, it’s important to list all of them so you can later work with your CPA to calculate the correct amount.

💶 Summarize all foreign taxes you paid

Here’s why summarizing the foreign taxes you paid is important. 

When you’re claiming the Foreign Tax Credit (FTC), the standard practice is to set off the taxes you’ve already paid in your resident country with what you owe the IRS – dollar-for-dollar. 

As an expat, without this arrangement, you can easily find yourself paying taxes twice: to your country of residence and the United States. It’s because the IRS levies taxes on your worldwide income, not just income earned or derived from the United States.

➡️ For clarity, you should keep the tax payment records for income taxes. The taxes you paid in your resident country for property, sales, or customs and excise taxes won’t qualify for the FTC.

These are some foreign tax payment details you’ll want to meticulously record:

  • The name of the income tax
  • The date the tax was accrued
  • The date you paid the tax
  • Any evidence of the income tax payment

📈 Summarize all foreign assets you held throughout the year

While it may look overwhelming at first, recording and summarizing all the foreign assets you held during the tax period will help you comply with FATCA requirements and FBAR reporting and avoid pocket-draining penalties that you may be slapped with later on.

As an expat, you must acquaint yourself with FATCA and how it applies to you.

Read more: What you need to know about FATCA 

But briefly, FATCA is an acronym for the Foreign Account Tax Compliance Act, a law passed by Congress in 2010 to help address offshore tax evasion.

FATCA bestows stringent reporting obligations on both foreign financial institutions and Americans with foreign financial assets. 

And FBAR reporting criteria are more rigorous than FATCA’s. And the penalties for not reporting can be disastrous.  

Read more: FBAR Filing Requirements for Americans Living Abroad

But as an expat, to prepare yourself for end-of-year tax filing (and to determine whether you meet the reporting thresholds), you should summarize your foreign financial assets including:

  • Cryptocurrency (including NFTs) 
  • Real estate 
  • Bank accounts, including investment accounts 
  • Retirement plans 
  • Life insurance
  • Foreign stock and securities, 
  • Foreign financial instruments, 
  • Contracts with non-U.S. persons, and 
  • Interests in foreign entities

💡 Other things for expats to remember at year-end

Retirement accounts

Expats who’ll want to put something in their IRA or 401(k) accounts— as a standard rule, the amount you can contribute depends on if you claim the Foreign Earned Income Exclusion (FEIE).

In short, if your earned foreign income is greater than your FEIE (which is $112,000 for 2022 and $120,000 for 2023), then you can actually put some money in your retirement account.

Let’s say you earned $150,000 from your German employer in 2022 and qualify for the maximum FEIE of $112,000. This means you’ll have earned an income of $38,000 ($150,000 – $112,000) for purposes of a retirement account contribution. 

And you’ll be able to put up to $7,000 into your IRA in 2022. 

⏳ However, here’s a date you’ll need to take mental note of. April 15

If you want to deposit some money in your retirement account, you’ll need to do it no later than April 15—regardless of when you file your income tax return.

Charitable contributions

It’s great if you’ve been generous this year by giving to your favorite charities. The animals. The environment. The children. All worthy causes and your donations can help reduce your tax bill too. 

To qualify for a tax deduction, there are two things you need to know.

  1. You’ll need to itemize deductions (instead of taking the standard deduction) on Schedule A and
  2. Donations must have been made to qualified US charities

Unfortunately, any donations you made to charities in your resident country won’t qualify for an IRS deduction. But hopefully, that won’t deter you from supporting the groups you care about.

Filing deadline 

By virtue of being a US expat, you’ll automatically receive a two-month extension to file your tax return. 

Instead of an April 15 deadline to file your Form 1040, you’ll have until June 15.

But, but, but…if you owe any tax, it’s due by April 15. 

Your automatic extension is an extension to file, not an extension to pay. Interest begins to accrue April 15th, but penalties won’t kick in until June 15th. If you want to pay as little as possible to the IRS, paying your tax bill by April 15th is your best course of action. 

Estimated payments

Lastly, in the hustle and craze of preparing for the holidays and the new year, you might easily forget to make your last estimated tax payment. So put it in your calendar and make the 4th quarter payment by the January 15 due date to avoid penalties.

Whew. There’s a lot that goes into preparing for end-of-year expat tax returns. 

While a few can brave it alone, we’ve always found satisfaction in guiding expats in their IRS tax compliance journey. 

Taking the load off your shoulder. Sifting through the details. Explaining the rules that impact your life circumstances. Whether you’re a digital nomad for the first time or an expat veteran, cross tax preparation off your to-do list and contact our expat expert CPAs today. 

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