Confused about your MyExpatTaxes Tax Package? Here’s How to Read it

Congrats on taking the step to become tax compliant! While living abroad as an expat is exciting, the duty to file (and even pay) US taxes every year is not. However, when you become fully tax compliant, you don’t have to worry about penalty fees or reviving your passport. Knowing which tax package to pick to remain tax compliant may be confusing, so keep reading to have many of your questions answered.

Now, you may have questions about the tax package you received. Well, we’re here to answer them for you! Check our our Q and A below.

Why do I owe US Taxes?

When you’re a US Citizen or Green Card Holder living abroad, you’re required to file US taxes to the IRS every year if you reach the income filing threshold. However, filing US taxes doesn’t always mean that you have to pay taxes. In most cases, you need to report your information.

How does that happen? It may seem confusing, especially since you usually won’t own US taxes. However, when you pay taxes in your adopted country, you probably won’t owe any US taxes because of certain expat tax benefits.

For example, you could use the Foreign Tax credits against your US income. Another option is to use Foreign Earned Income Exclusion to exclude your foreign wages from US taxation. 

However, there are some instances why you would pay US taxes to the IRS:

• Have US-sourced income, which is over the standard deduction, thus subject to US income tax
• Have US-sourced income with no federal taxes withheld
• Do not pay enough foreign income tax on unearned foreign income, which is still subject to US taxation (e.g., capital gains on foreign property sold)
• You’re subject to self-employment tax, and there’s no Totalization Agreement in the country you’re in

Why do I have a refund?

There are a few reasons why you’re due for a refund on your US tax return, even if you’re not living in the US.

• Additional child tax credit
• If you have US-sourced income and have federal withholdings
• If you paid estimated taxes on prior-year filing
• Premium Tax Credit

Why is there a negative sign in Line 8?

The negative sign in line 8 shows that we’ve used the Foreign Earned Income Exclusion on your return.

You can find the computation in Schedule 1 of the return, the Other Income Statement (at the end), and Form 2555.

Why do I see multiple Form 1116s?

Each Form 1116 has a Regular and an Alternative Minimum Tax (AMT) version tied to Form 6251. This AMT tax calculation is always run in the background to avoid taking too many credits or deductions.

As you have both General and Passive income, there are 2 Form 1116s, each with two versions. It’s not as confusing as you may think; we always track foreign tax credits, and it is part of the standard tax package.

Why do we revoke the Foreign Earned Income Exclusion? 

If you have used the Foreign Earned Income Exclusion (FEIE) in your previous year, in some instances, revoking it for a specific tax year and claiming the Foreign Tax Credit (FTC) would be beneficial. Some of the few instances are:

• When you want to claim the child tax credit
• When you want to contribute to the IRA
• When you’re paying your correct taxes, and you’re in a country that has a higher tax rate than the US

Can I claim the Child Tax Refund with Form 2555? 

With Form 2555, you cannot claim the Additional Child Tax Credit refund. However, with Form 1116, you can.

At MyExpatTaxes, our expat tax software allows you to claim the tax credit and will help you determine whether you can receive the new fully refundable credit of $120,000 on your taxes.

We can also help you start using the Foreign Tax Credit to receive the Child Tax Credit instead of the Foreign Earned Income Exclusion. Learn more about the Child Tax Credit for American families.

Can I contribute to my IRA if Taxable Compensation is excluded?

You cannot contribute to your IRA if almost all your taxable compensation is excluded via Foreign Earned Income Exclusion/Form 2555. Remember, Form 2555/FEIE This form is also not a required expat tax form – you can use either Form 2555 or Form 1116 (as used in your tax package) to offset US taxes.

Instead, it may be more beneficial to claim the FTC (Foreign Tax Credit) since it can bring better results than the FEIE and still allow you to contribute to your IRA as a US citizen abroad.

As an American abroad, when you utilize the Foreign Tax Credit, you’ll be reporting your net self-employment income or wages as taxable. This not only enables you to open and contribute to a US IRA account but also provides a tax reduction in the United States corresponding to any taxes paid to the country where you work and/or reside. Consequently, the Foreign Tax Credit has the potential to eliminate your US tax liability, similar to the Foreign Earned Income Exclusion (FEIE).

Saving for retirement as an American abroad by having an IRA helps with financial security for your future. As you are coming into retirement, you know you will have money to live off of due to your efforts in early investing. 

Learn more about IRS contribution limits and retirement topics or about revoking the Foreign Earned Income Exclusion.

Have More Questions as a US Expat?

Hopefully, this blog clears up any confusing questions about which tax package to choose. Nevertheless, our friendly tax team is ready to answer any more MyExpatTaxes package questions you may have through our available live chat.

Thank you for choosing MyExpatTaxes, which was awarded the Best US Expat Tax Service Company of 2023 by Acquisition International and Leading Software for US Expats by Bold Awards.