When Do Expats Need a Tax Preparer? 9 Common Scenarios

This year, almost three-quarters of Americans said they planned to file their own taxes — either manually or with the help of tax preparation software. In some cases, this makes sense. If all of your income is W-2 income, you hold minimal assets, and you don’t mind putting in the effort, filing on your own is fairly manageable.

In other situations, though, working with a tax professional is the best way to ensure accuracy and an optimized tax return. This is especially true for expats, who are often subject to additional tax reporting obligations, filing requirements, and tax breaks. But when exactly should you stop filing on your own and start working with a tax preparer? 

Below, we’ve outlined several situations in which it’s especially important to work with a tax professional. Learn why these situations can be challenging, what the potential consequences of incorrect filing are, and how a tax preparer can help you achieve the best outcome possible.

You’re filing US expat taxes for the first time

All American citizens and permanent residents who earn more than the minimum reporting threshold — even those living abroad — must file a federal tax return. Expat tax returns function a bit differently than your typical US taxes, though.

For example, US expats are often eligible for tax breaks that Americans living stateside are not. These include the:

• Foreign Tax Credit (FTC)
• Foreign Earned Income Exclusion (FEIE), and
• Foreign Housing Exclusion/Deduction (FHE/FHD).

Depending on your country of residence, you may also be able to claim benefits from a tax treaty or totalization agreement.

However, as an expat, you may be subject to additional or different reporting requirements. A couple of common reports US expats must file include the Foreign Bank Account Report (FBAR) and the Statement of Specified Foreign Financial Assets (Form 8938). If you’re a business owner, recently introduced legislation requires you to fill out the BOIR as well.

When filing expat taxes on your own for the first time, you risk:

• Overlooking the additional rules and paperwork due to a lack of awareness
• Not claiming all of the tax breaks you qualify for, or the opposite — claiming a tax break you’re not actually eligible for, which can result in an amended return and potential IRS penalties
• Failing to submit required disclosures

Working with a US tax professional with extensive experience preparing tax returns, however, can help by:

• Taking the effort and stress out of filing US expat taxes by doing the heavy lifting and ensuring an accurate filing
• Determining which tax breaks you’re eligible for and which would be most beneficial to claim
• Ensuring that you file all of the forms necessary

You’re facing an IRS audit

About one in 500 tax returns results in an IRS audit. When that happens, hiring a tax professional is a must. Expertise and accuracy are of the utmost importance when dealing with potential IRS issues. Without specialized tax knowledge, it can be difficult to understand where things went wrong and how to make them right.

Attempting to handle an audit on your own can result in:

• Unsuccessful appeals
• Prolonged, stressful back-and-forths with the IRS
• Hefty fines

A tax preparer with professional credentials and experience, however, can help you:

• Appeal the audit when appropriate
• Communicate with the IRS (or do it on your behalf)
• Reduce fines and penalties
• Secure a more favorable payment plan with the IRS

You’re self-employed or own a business

Taxes for the self-employed and business owners are often more complex than for employees. For one, you have no employer to withhold taxes from your paychecks. Instead, you’ll be responsible for proactively making quarterly estimated tax payments on federal income taxes, self-employment taxes, and sometimes state taxes.

Being self-employed or owning a business opens up many potential tax deductions. Depending on what type of business you own, you likely have to file additional or different tax return forms (e.g. Form 1120 S, Form 5471, Form 8865 or Schedule C).

Attempting to tackle these topics on your own can result in:

• Missing out on tax breaks that could significantly mitigate your tax liability
• Making errors that require an amended return
• Accidentally paying more in taxes than you have to, or paying less than you should — and dealing with late fines and penalties later on
• Failing to file all of the forms that you need to

Hire a tax preparer, on the other hand, and they can help you:

• Determine which US taxes you’re subject to, and whether you qualify for a tax break, treaty, or agreement that exempts you from them
• Understand which business structure would be best for you
• Ensure an accurate filing, and prevent you from having to file an amended return
• Identify an optimal tax strategy that minimizes your US tax liability
• Bring you up to full compliance — and help you stay there

You are subject to taxation in another country

Each country defines tax residence differently — but if you live in a given country for long enough or maintain strong ties there, odds are you’ll qualify as a tax resident. And since all American citizens and permanent residents are subject to US taxation, this often opens you up to the possibility of double taxation.

If you tackle this on your own, this often means:

• Having to navigate two different tax systems
• Filing two different tax returns
• Paying income taxes to both your country of residence and the US

Fortunately, a dedicated US expat tax professional can usually help you avoid this by:

• Serving as your go-to expert on US expat taxes
• Filing your US tax return on your behalf
• Claiming the right tax breaks to minimize your US tax burden as much as possible

You have multiple streams of income

Different types of income have different tax implications. When you have just one source, it’s simple enough to find out how the government taxes it, which form you report it on, and which tax breaks (if any) it’s eligible for. But besides employment and self-employment income, many US expats earn additional income:

• Interest from foreign financial accounts
• Capital gains from selling assets like real estate or stock
• Social Security or retirement account payments
• Rental income from a foreign property

The more types of income you combine, the more complex your filing gets. Certain income, like capital gains, is subject to different tax rates than the standard ones. Other types of income may qualify for specific but complicated tax breaks, like depreciation or tax loss harvesting.

In such cases, filing independently can result in:

• Reporting a certain type of income on the wrong form
• Missing required forms or reports
• Failing to capitalize on all of the tax breaks available to you
• Claiming a tax break on the wrong income (e.g. trying to claim the FEIE for passive income like dividends)

A tax professional can help those with multiple streams of income by:

• Reporting the right types of income on the right forms
• Ensuring you file all of the forms and reports you should
• Knowing which tax breaks are available and which types of income they apply to
• Mitigating the tax burden on each source of income

You’re behind on tax returns, payments, or reports

It’s not uncommon for US expats to think that moving abroad relieves them of their US tax and reporting obligations. Other times, nationals of other countries will discover that birth or former residence in the US—or an American parent registering them as a US citizen at birth—makes them a US tax resident even decades later.

Discovering that you owe back taxes can be nerve-racking, to say the least. Trying to catch up on your own can result in:

• Feeling anxious and overwhelmed
• Having to pay significant fines and penalties
• Not capitalizing on all of the programs and tax breaks available to you

A tax professional can help you catch up by:

• Providing a realistic assessment of your situation and answering your questions
• Taking advantage of programs like the Streamlined Foreign Offshore Procedures to catch up without additional fines or penalties
• Coming up with a tax strategy to minimize your overdue tax burden

You’re married to a non-US citizen or permanent resident

It’s probably no surprise that a major life event like marriage affects your taxes. But unfortunately, taxes become significantly more complicated when you marry a foreign national.

If your spouse spends enough time in the US or earns US-sourced income, for example, they may need to file a US tax return. And while filing jointly allows you to claim additional tax breaks and deductions, it also ropes your partner into the US tax system indefinitely. If you attempt to handle tax returns on your own, you risk:

• Not understanding whether or not your spouse is on the hook for US taxes
• Choosing a filing status that increases your overall tax burden
• Missing out on available tax credits and deductions

A tax professional can help you navigate this situation by:

• Providing clarity on whether or not your spouse has to file US taxes — and filing it on their behalf if they do
• Determining the best filing status for your financial situation
• Claiming all of the tax credits and deductions available to you

You’re about to buy or inherit a major asset

Whether you’re about to buy a primary home abroad or inherit a trust from a grandparent who recently passed, it’s best to consult a tax professional.

While purchases don’t necessarily have to be reported at the time, they can have tax implications down the line if you decide to sell. Although there’s no federal inheritance tax, several states do have inheritance tax laws. An inheritance from a foreign national can also trigger several different US reporting obligations depending on the type of asset and value.

In any case, it’s worth discussing with a tax professional. Otherwise, you might end up:

• Not understanding the long-term tax planning implications
• Failing to file the proper forms
• Having to pay state taxes on an inheritance

A tax professional can help you navigate major purchase decisions and inheritances by:

• Discussing the long-term tax implications
• Filing all of the required paperwork
• Clarifying whether or not you need to pay taxes

You want to sell or gift a major asset

On the flip side, working with a tax professional is also important when you’re considering selling or gifting a major asset. In most cases, selling a major asset results in the capital gains tax. The US taxes capital gains at one of two different rates:

• Short-term capital gains: Ordinary income rates (10% to 37%, depending on overall income) on anything held for a year or less
• Long-term capital gains: 0%, 15%, or 20% on assets held for over a year

Gifting a major asset, meanwhile, can result in additional taxes and reporting requirements, particularly if:

• The person receiving the gift is not your spouse
• The gift’s value exceeds the annual limit ($17,000 for tax year 2023; $18,000 for 2024), OR
• The gift’s value causes you to exceed the lifetime gifting threshold ($12.92 million for 2023, $13.61 million for 2024)

Without a solid understanding of the tax implications of selling/gifting, you risk:

• Failing to file all of the required documentation
• Selling at a non-optimal time, resulting in a less favorable tax rate or even a higher overall tax bracket
• Exceeding the gift limit without realizing it, triggering taxes or fines for late/missing reports

A tax advisor can help you by:

• Filing all of the required documentation on your behalf
• Walking you through the tax implications of selling now vs. later
• Ensuring full compliance when making substantial gifts to avoid late fees or penalties

Partner with Bright!Tax for an optimal tax filing

As you can tell by now, there are many different situations in which it’s advisable to work with a tax professional. Even if you have a straightforward tax situation, leaving your return in the hands of a professional ensures higher accuracy and a lower tax burden.

Resources:

1. 75% of Americans Plan To File Their Own Taxes
2. Many taxpayers fear getting audited by the IRS. Here are the odds based on your income.