5 Tax Saving Tips for US Tax on American Expats
Whether you are a US citizen, a Resident Alien or an American Expatriate (Expat), there is no escaping tax. Since tax payment constitutes a major portion of your expenses and with the introduction of new tax filing forms requirements imposed by the Foreign Account Tax Compliance Act (FACTA), taking steps to ensure tax savings is the only long-term solution to save up on your finances.
If you’re an American expat living abroad and wish to save your tax payable in the States, here are the 5 simple solutions you can follow:
Do NOT Invest in Mutual Funds
IRS classifies all foreign mutual funds as Passive Foreign Investment Company (PFIC), unless the fund is designed as a partnership. PFIC includes all foreign money market funds, pension plans and insurance-investment schemes and their earnings are subjected to excessive tax by IRS. Unless you intend to invest in a foreign mutual fund to save up enough on local tax to offset U.S. tax payable, mutual fund investments should not be considered.
Consider the Nationality of Your Spouse
If your spouse is neither a U.S. citizen nor a green card holder, then you have an option when it comes to filing tax returns. These options include mentioning your status either as Married Jointly Filing (MJF), Head of Household (HOH) or Married Filing Separately (MFS). Each of these three statuses’ has long-term implications on your tax liability and tax payable in U.S. It is highly advisable to consider the tax pros and cons of each status before filing the return. Click here to learn more.
Select the Correct Form
Apart from the regular Form 2555 (Foreign Earned Income) and Form 8938 (Statement if Foreign Financial Assets), there are several other Forms (such as 926, 3520, 8865 and 5471) that are expat-specific and can help you save on your taxes. Read the list of all U.S. tax forms for Expat Americans before selecting deciding on which form is best suited to your situation and status.
Consider Investing in IRAs
Individual Retirement Accounts (IRAs) are important when it comes to U.S. tax savings for expats. Traditional 401(k) schemes allow you to defer your taxable income and lower your marginal tax rates in the current year. Disbursements from Roth IRA, on the other hand, are exempt from tax. This makes them perfectly legal, tax-saving offshore accounts for investment. If you consider investing in any IRA, you might have to pay tax on any retirement account you own in your country of residence. It is necessary to evaluate all investment savings, costs and options before investing in an IRA.
At the same time, make sure you are eligible to invest in a traditional IRA or Roth IRA as ineligibility can lead to a 6% penalty imposed by the U.S. Government.
File Your Returns Every Year
Even if your income falls below the minimum amount chargeable to tax, you should still file a return with IRS, since your worldwide income is subjected to tax. Failure to file a return in, any year, will likely result IRS to disallow certain expenses and impose penalties in the future.
If you’re an American Expat and want to learn more on how to calculate your U.S. tax payable and evaluate further tax options, please click here.