Tax Tips for U.S. Americans Abroad
Are you living and working abroad on a short-term assignment (i.e. less than 1 year)? If yes, you’re termed as a short term American abroad and are still held responsible for handling taxes in both the USA and the foreign country.
In fact, it’s good to also check to see what tax rate bracket you fall in. This assures you pay the appropriate taxes (however, you can also just come to us and we’ll do it for you). The US tax system is a progressive one, as income rises, increasingly higher taxes are imposed. And yes, your income earned abroad will be included in your US taxable income as well!
Changes for Short-Term US Americans Abroad
So, unfortunately, there are no changes in the US tax rate if you are a short term American abroad on a short-term assignment. You also can’t “exclude” your foreign earned income from US taxation. This is typically referred to as the Foreign Earned Income Exclusion/form 2555, which you can read its full definition here).
BUT let’s say you work in Japan for a 6-month project. You can make sure you are NOT double-taxed by keeping records of all the income taxes you paid in Japan. At the end of the year, your total US tax will be calculated on your worldwide income (US/Japan earned income). You can then convert the Japanese income tax amount paid into USD and use that for a $ for $ credit.
So if you owe $10,000 in US taxes, but already paid $5,000 to Japan, you might be able to deduct that full $5,000 off your US tax bill. That way you aren’t stuck with two bills on the same income! This expat tax benefit is called the Foreign Tax Credit (FTC).
Some important facts about FTC:
- Foreign Tax Credit Categories: In order to use FTC, you have to know which category your income falls into (there are 7 categories for 2018). The most common categories are General (salary/self-employment income) and Passive (investment/rental).
- Allocation of Expenses and Deductions against FTC: You’ll have to know your Taxable Income from non-U.S. sources in order to calculate the portion of your US taxes that can be offset by FTC… this means being able to allocate your itemized or standard deduction among other expenses to your US/non-US income. It is a lot of math, but it’s important to make sure you aren’t claiming the wrong amount of FTC.
- Carrying Credits Over & Back: Even if you cannot use all your FTC because of your host country taxes you more than the US would, doesn’t mean that those credits are lost! It’s important to keep track of any unused credits for future years (up to 10 years!)
Claiming that Foreign Tax Credit can be tricky. You would need to use Form 1116 and to also calculate your Alternative Minimum Tax as well.
Short Term Americans can still use MyExpatTaxes!
Don’t cancel your international work assignment just yet though. Whether you are a short term or a long term US American expat, you can still use our software at MyExpatTaxes. From this, you can get your US taxes done in a fun and easy way. Our particular software can help you sort out which tax benefit is best to use.