Tax Tips for Expats, Digital Nomads, and Other US Citizens Who Live Abroad
Expats, dual citizens, digital nomads: all people who may retain American citizenship but don't spend much time in the US which can lead to serious headaches at tax time. Here are some tips to help you understand your dual citizen and expat taxes.
Why Do I Need to File a Tax Return if I Don't Live in the US Anymore?
The United States and Eritrea are the only countries in the world that tax you based on your citizenship, not your residency. If you haven't turned in your passport, you still need to file a federal tax return even if you didn't have any US-sourced income. Even if you have to file a tax return in the country(ies) you've lived in most of the year, it doesn't relieve you of being obligated to file a tax return.
However, while you still have to file a return it may not mean you'll need to pay taxes. Whether you have to pay taxes depends on your sources of your income as well as how long you've lived outside the US during theyear. The income must be reported but may not necessarily be taxed.
You also may or may not need to file state income tax returns. If you own interest in a business as an investor or participating in it from around the world as digital nomads are wont to do, you need to worry about this more than an expat with a job. State taxes may also be a concern for you if you own rental real estate.
US Income Tax Relief if You Live Abroad
Your US-sourced income will still be subject to income tax regardless of the amount. For your foreign-source income, the two most common tax relief measures available to most expats are the foreign earned income exclusion and foreign tax credit.
The foreign earned income exclusion (FEI) for the 2015 tax year is $100,800. You can exclude up to $100,800 USD of foreign-sourced income from federal taxation while any income over that amount is not exempt. There are also certain residency and physical presence tests you must meet to qualify for FEI.
Self-employed expats can use FEI for US-sourced clients and gigs, but are still subject to self-employment tax unless you are a resident of a country that has a totalization agreement with the US.
The foreign tax credit is less strict than FEI when it comes to residency, in that you can claim a credit for foreign income taxes regardless of if you hold citizenship in that country or lived there most of the year. But you can't take both the credit and deduction, only one.
What Records Do I Need to Keep?
Keep track of dates you enter and leave the US as you must report how many days you lived abroad to claim FEI. Digital nomads need to be particularly careful with the "substantial presence" test, as hopping countries and states may mean just missing the 330 day mark of being able to claim FEI.
Carefully note how much you pay in foreign income taxes. If self-employed, make sure to keep track of where you performed services and for whom.
Dukhon Tax is available to assist dual citizens, expats, digital nomads, and other taxpayers living abroad with their federal and state tax concerns.
Sources:
https://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion
https://www.irs.gov/Individuals/International-Taxpayers/Foreign-Tax-Credit
Life Milestones and Their Effect on Your Taxes
The breadth of our life experiences and changes that occur as we mature always have wider tax implications. The major milestones of our lives bring both tax benefits and liabilities. Almost every milestone we reach, whether it includes the excitement of change or the sadness of loss, directly or indirectly affects our status as a taxpayer.
For example:
Getting married
Whether you file separately or jointly, your filing status will change when you marry. You will be able to claim a new tax exemption and adjust your paycheck deductions. Also, working couples have an advantage over single taxpayers, whose earnings reach the higher tax brackets sooner.
Having children
Your little bundle of joy becomes a tax exemption for the entire tax year. With the 2 AM feedings come advantages like child tax credits and other benefits. For example, when both spouses return to work, there is the Child and Dependent Care Tax Credit to pay a babysitter during the workday. Also there are tax credits and other breaks when the child goes off to college.
Losing your job
Lose your job and you immediately enter a lower tax bracket. Worse news is that you will be taxed on unemployment benefits and will be liable for taxes on severance pay and vacation time your former employer bought back. Make sure your former employer sends you that W-2. Keep track of job search expenses- they could be tax deductible.
Divorcing or Legally Separating
You are considered unmarried at the end of the tax year when separated under a divorce decree or a separate maintenance agreement. Alimony you receive or pay is either taxed or can be deducted, depending on whether you are the receiver or the donor.
Likewise, whichever divorced parent has custody of a child for the greater part of the calendar year will be eligible for dependency deductions and other tax benefits accruing from having a child. Although alimony can be tax deductible, child support is not.
Moving to another state
Heading out for that new job and fresh start? You can deduct some of your moving expenses for which your employer will not reimburse you . You will need to deal with the tax rules of both your former and your new state and might end up filing two state tax returns. Also, resist the temptation to cash in your former employer's retirement plan. Otherwise, you could be looking at a high income tax rate on the proceeds.
Saving for retirement
Most likely, your Social Security benefits will not be enough to assure a comfortable retirement. Whether you participate in a 401(k) or traditional IRA, your contributions will reduce your yearly income tax bite. Your retirement years will also be taxed as the government takes back some of that Social Security money for income tax and Medicare coverage. You will also need to plan those traditional IRA withdrawals beginning at age 70 years six months.
Meanwhile, in between milestones…
Life happens in between all of these milestones. We get busy and sometimes forget the tax implications of our happiest and saddest moments. Reach out to us at Dukhon Tax and Accounting if there is any way we can help you focus on these milestones without worrying about your taxes.
Don't Want to Buy Health Insurance? Look Into Market Place Hardship Exemptions
If you can afford health insurance but you don't wish to buy it expect a higher federal income tax bill for 2015. Under the Affordable Care Act, unless you have a health coverage exemption, the IRS will assess an additional penalty, using the higher result of the following two criteria:
- 2% of your yearly earnings: The amount of income above about $10,150, the tax-filing threshold, is what you use to calculate the penalty. The amount is capped according to what the IRS figures is the "average bronze plan premium."
- $325 per person for 2015--$162.50 per child under age 18: The maximum family penalty per family using this method is $975.
What qualifies as health coverage--and what does not
Most health plans, including any Marketplace plan, or individual insurance plan you already have qualifies as coverage. Any job-based or retirement plans, Medicare Parts A or C, and TRICARE plans for military retirees also qualify.
Not all plans offered outside the Marketplace will qualify for minimum essential coverage, though.
Plans that would not qualify include:
- health plans that cover a fixed, limited term
- health plans that have fixed benefit restrictions
- Medicare supplemental plans only, like Part D and Medigap
- certain Medicaid schemes covering only specific benefits
- limited-benefit plans, e.g., vision only, dental only
Exemptions and how to get them
For tax year 2015, you can apply for an exemption to avoid paying the tax penalty. The exemptions are income, health, and group membership related. They also cover anyone serving a prison sentence, U.S. citizens living abroad, and certain non-citizens.
Income-related
You could qualify for an income-related exemption if:
- the least expensive health coverage available (Marketplace or job-based) would amount to more than 8.05 percent of your household income
- you do not earn enough to be required to file an income tax return
Health coverage related
These apply when:
- your lack of health insurance coverage was for no more than two consecutive months
- your home state failed to expand its Medicaid program to meet the requirements of the Affordable Care Act, but if it had, you would have qualified
Group membership related
Certain groups are exempted:
- members of a federally recognized Native American tribes
- members of a recognized health care sharing ministry
- religious sects that object to health insurance, Medicare and Social Security
Hardship exemptions
Some life situations can prevent you from getting health insurance. Examples of hardships that qualify include homelessness, eviction or foreclosure, domestic violence, natural disaster, family tragedy, etc.
To qualify for a hardship exemption, you must complete a paper application and mail it to the Marketplace. For a list of qualifying hardships and instructions on how to apply, go to the Healthcare.gov webpage.
Loss of previous coverage
Likewise, if your insurance company canceled your plan, and you believe other Marketplace plans are unaffordable, you can apply for an exemption. The above-mentioned 8.05 percent of the household income criteria applies.
You can apply for this exemption either on your 2015 income tax return or completing a separate Marketplace exemption application. Download the application forms and instructions from the Marketplace.cms.gov website.
Need some help?
Your health coverage now affects your 2015 federal income tax return. The fees for not having health insurance could be another unexpected financial hit. Need some help or advice on addressing tax implications on yourself, your family or your employees? Dukhon Tax and Accounting has the expertise and experience to help you through tax year 2015 and beyond with the plans and strategies you need for the best tax planning.
Estimated Taxes: Who Has to Pay Them and How?
The majority of taxpayers pay their taxes due annually when filing their tax return for the year. In some circumstances, however, taxes must be paid to the IRS on a quarterly basis. These tax payments are called estimated taxes because they are based on the amount of income that an individual or business expects to make for the year.
Read more
Lower your Tax Liability with Deductions and Credits
Tax deductions and credits help taxpayers reduce their tax liability. The differences between the two are in their definitions:
- A tax deduction reduces your gross income and arises from a deductible expense. Taxpayers can take a standard deduction up front or itemize expenses.
- A tax credit is an amount of money applied directly to the tax liability. Tax credits are far less common.
About Tax Deductions
Say your adjusted gross income for 2014 was $75,000. If you filed jointly with a spouse and were born before January 2, 1950, your standard deduction would have been $14,800. You figure your income tax bill based on a reduced income of $60,200.
There are, however, other “above-the-line” deductions you can claim to lower the aforementioned $75,000 adjusted gross income. For tax year 2014, those deductions are listed on lines 16 through 21 on Form 1040A and lines 23 through 37 on Form 1040. Deductions common to both forms are:
- Educator expenses
- IRA deductions
- student loan interest payments
- tuition and fees
Taxpayers wanting to take advantage of business, health savings, moving, self-employment, alimony payments and other expenses, need to file Form 1040, fill out the additional IRS forms and hope for the best -- the “best” being avoidance of an IRS audit trigger.
The alternative to taking the standard deduction is to fully itemize your expenses for the tax year. To be worth the trouble, your itemized expenses must exceed the standard deduction. Attach Schedule A to Form 1040 to document the following:
- Medical and dental expenses that exceed 7.5% for seniors’ and 10% of younger taxpayers’ adjusted gross income
- State and local taxes
- Interest payments on home mortgages, etc.
- Charitable gifts of at least $250 in cash or $500 in other than cash
- Casualty or theft losses
- Unreimbursed job expenses
- Other miscellaneous deductions specified in the Schedule A instructions
If your adjusted gross income was not over $152,525 for 2014, your deduction was not limited. Wealthier taxpayers must use a worksheet that reduces the overall deduction that can be claimed.
About Tax Credits
If you can claim a tax credit (lines 31 through 38 on form 1040A and lines 48 through 54 on Form 1040), you can subtract that amount from the taxes you owe. It is a 100 percent, dollar-for-dollar tax relief, regardless of your taxable income. Tax credits for individual taxpayers are far less common and generally apply to the following:
- earned income tax credit
- education credits
- child and dependent care credits
- child adoption credits
- saver’s credits
Business tax credits, on the other hand, run the gamut from general business, investment, electric vehicle and other energy credits to mine rescue team training. The credits are designed, among other things, as incentives for community development, research and energy savings.
The Bottom Line:
For the average taxpayer, tax deductions lower the amount of income subject to federal income tax. Unless you have had large deductible expenses during the tax year, taking the standard deduction is the easiest way to complete your tax return. If you can qualify for a tax credit, which will apply dollar-for-dollar to reduce your tax bill, you can offset your tax liability.
Contact Dmitry Dukhon at Dukhon Tax to help you get organized, file your returns and answer any questions you may have. We can be an invaluable resource for you to make the process as smooth as possible.
Plan Ahead for Your 2015 Tax Filing
Experience can be a good teacher, but we shouldn’t learn everything through our mistakes. For example, if the IRS penalized you last April because you underpaid your taxes, you can fix that for this tax year. Consider having your employer deduct more from your wages, or at least going the estimated tax payment route.
We may be halfway through 2015 but there is still time for you to map out a strategy for this year. Here are 3 things you can start doing right now:
- Get organized.Getting organized might not cut your taxes, but good record keeping avoids the number 1 and number 2 hassles of tax preparation: 1) Bad records keeping makes it impossible to do a thorough and timely job on your tax return; and 2) The IRS requires documentation if you get audited.To get organized, at a minimum you should:
- keep last year’s tax return handy
- use personal finance software to keep track of tax-related income and expenditures
- throughout the year collect and group receipts and papers that affect your taxes and keep everything in a separate file
- safeguard the W-2s, 1099s, bank interest, mortgage statements, etc., that typically arrive in January
- plan to store your files for at least 3 years (7 years is optimum, since IRS audits can go back that far.)
- Itemize your tax deductions.
- Visit the IRS website and see Topic 500 - Itemized Deductions. You will need Form 1040, Schedule A and its accompanying instructions. Before you get to Schedule A, however, there are deductions like IRA contributions that don’t need to be itemized and can reduce your taxable income. You’ll find them in items 31 through 38 on IRS Form 1040A and 48 through 54 on Form 1040. For each deduction you’ll need to attach a corresponding IRS Form.Don’t forget to look into tax credits, which can also reduce your tax bill dollar-for-dollar. They are, however, less common than tax deductions.
- Gather the tax forms you need.
- Go right to the source on this one. The IRS has a complete catalog of forms and publications on its website. While there’s still time, it won’t hurt to review the forms and instructions for changes or additional documentation. Make a list of the forms you need; download them and shake your head in wonderment at the enormously complex tax code we live under.Above all, be on time.The end result of all that planning is that you have a complete and accurate tax return ready for submission on or before the tax-filing deadline. Even if unforeseen circumstances keep you from meeting the due date, you still must make a reasonable estimate of your tax liability and pay any balance due with your extension request. Even though the IRS holds all the cards, your ace in the hole will be your preparation and planning.…And Get Help.If after reading all the advice above, you’d rather leave tax planning to experts so that you can get on with your life and business, consider working with a knowledgeable tax advisor. Contact Dmitry Dukhon at Dukhon Tax to help you get organized, file your returns and answer any questions you may have. We can be an invaluable resource for you to make the process as smooth as possible.
Reduce Your Tax Liability With These 3 Often Overlooked Tax Deductions
As the tax year matures, it is not too late to find ways to reduce your personal or small business income tax bill. Below are three areas to pay attention to throughout the year:
1. Take more charitable deductions.
You are probably aware that you can deduct the cash or value of property you give to charitable organizations. However, you might not be taking full advantage of this benefit. For example, you can deduct:
- Out-of-pocket costs for volunteer charitable work; e.g., cost of food ingredients for those pastries you donated, or stamps you bought for event mailings
- Childcare (babysitting, etc.) expenses you incurred while you did unpaid volunteer work
Make sure you fully document any charitable expenses, especially the unusual ones. A large number of deductions in this area could trigger an IRS audit.
2. Look out for unusual business expense deductions
A junkyard or scrapyard owner could, for example, deduct the cost of cat food to lure neighborhood cats and keep the rat population down. It is an unusual, but valid business expense.
More traditionally, self-employed business travelers can deduct those aggravating extra charges that airlines love to add to the cost of your ticket. Extra fees for baggage, online booking or ticket changes earn commercial air carriers billions each year. Don’t forget to add those charges to your deductible business expenses.
Again, for obvious reasons, save your receipts.
3. Deduct those job-hunting expenses.
Anyone who has lost a job and has gone to the excruciating effort of finding a new one knows that job-hunting can be as expensive as it is exhausting. If during your job search you were looking for a position in the same line of work as your most recent job, and if you’re willing to itemize and document those expenses, you can deduct them -- even if your job hunt was not successful.
Below are some deductible expenses: (The list is by no means exhaustive)
- transportation expenses incurred as part of the job search (cabs, auto, commercial, etc.)
- food and lodging expenses for out-of-town job interviews
- fees paid to an employment agency
- printing costs for résumés, business cards, advertising and postage
The foregoing deductions do not apply to a first-time job hunt. However, any moving expenses involved in landing that first job are deductible, even if you don’t itemize deductions.
Below are three more miscellaneous deductions that not many people know about.
You can deduct:
- the additional extra 7.5 percent you had to pay for self-employed Social Security tax
- health insurance premiums -- deductible at 100 percent of the premium cost for self-employed tax payers
- alternative energy equipment such as solar hot water heaters, geothermal heat pumps and wind turbines -- This tax credit is a whopping 30 percent write-off of the total cost (including labor) for those systems up through 2016.
Don't miss out
There are many more deductions and credits you should know about before you send off your next tax return. Don’t wait until next April 1st to discover that you are eligible for an array of deductions and credits, but you failed to keep the records and receipts. Contact us for the tax planning, guidance and professional tax preparation that will mean more money for you and your business.
Sources:
Principal sources for this article was the irs.gov web page, Credits & Deductions at http://www.irs.gov/Credits-&-Deductions and an online information page from TurboTax entitled "9 Things You Didn't Know Were Tax Deductions"
4 Questions You Should Ask Your Tax Advisor This Tax Year
According to a piece in Business News Daily, tax year 2015 brings some new challenges and opportunities for small business owners in Boston and throughout the U.S. business landscape. If you want to stay ahead of the curve, you probably should ask our tax advisor a few questions.
Here are four to get you going:
Question 1. How does The Affordable Care Act (aka: Obamacare) affect my business?
The challenge: The act added another 2,400 pages to the already prodigious tax code. The IRS is now the gatekeeper for employee insurance coverage rules, which go into effect as follows:
- January 1, 2015: Businesses with 100 or more workers must offer health insurance to 70 percent or more of their full-time employees.
- January 1, 2016: The minimum number of employees drops from 100 to the 59-99 range.
Tax penalties include up to $2,000 per non-covered employee. The IRS will audit employees’ W2 forms as employers report the cost of health coverage they provide. One tax expert from a Los Angeles-based tax advisory firm puts it succinctly: “It’s going to be a big regulatory nightmare.”
Question 2. I rely on online sales to out-of-state buyers. Will I have to report and collect sales taxes for states other than my own?
The short answer: If you do business on line, your days of out-of-state “tax-free clicks” are probably numbered. The reintroduction of the so-called “Marketplace Fairness Act” gives each state the authority to force out-of-state businesses to collect sales tax from online or catalog purchases.
The bill is now in the Senate and has bipartisan support. (See https://www.congress.gov/bill/114th-congress/senate-bill/698/actions for updates.)
Question 3. How will Republican control of both houses affect the tax laws that regulate my business?
Again, the short answer: The Republicans are in charge and “everything is on the table.” Now in control of both houses of Congress, the Republicans could have significant impact on taxes. According to the chairman Senate Finance Committee, there could be “new momentum” for overhaul of the U.S. tax code in 2015, which could impact the business tax burden.
Stay tuned to find out if Republican election promises materialize beyond the bluster, inaction and finger pointing that has characterized the U.S. Congress for so long.
Question 4. What can I do to keep from being overwhelmed by tax laws and IRS regulations?
A partial answer involves staying ahead of the curve. Business owners don’t have to become overwhelmed. Take the following steps to go from reactive to proactive:
- Keep taxes top of the mind all year long. Tax planning has to be a year-round effort. Just as in personal tax returns, waiting until the last minute complicates the process and limits options.
- Avoid business decisions based on assumptions that existing tax breaks will continue. One expert advises clients “to make sure the tax tail isn’t wagging the dog.” Don’t make business decisions based solely on taxes. Keep the business in the forefront. If the tax breaks come, that is definitely a bonus.
- Stay aware, and informed. Business owners need to keep up with laws and the myriad IRS regulations. Even with expert help, business owners need to stay alert to stay ahead.
Finally, if you haven’t already done so, hire a pro. If you overlooked business tax credits and deductions because of poor record keeping, or you are simply unready to cope with the burden of Obamacare, it’s not too late to catch up. Make 2015 the year you finally got the year-round tax planning, guidance and professional tax practice can provide.
Contact Dukhon Tax about all your tax concerns and start tax planning in advance to increase your bottom line!
Buying Time and Clearing up Your Tax Debt to the IRS
The IRS is like a collection agency on steroids. Each passing day that you owe back taxes accrues additional penalties and interest on the amount due. But you still have options -- a tax filing extension and installment plan, to name two -- if you want to avoid compounding your problems with ruinous IRS levies and liens.
The tax is due on April 15th, regardless
If your tax situation is so muddled or complicated that you cannot gather up what you need to file by April 15th, you can submit an extension request -- IRS Form 4868 -- online or by mail. Your new due date will be October 15th. However, filing the form does NOT EXTEND your due date to pay what you owe. According to a piece on the US TaxCenter website:
“[A] tax extension gives you more time to file your income tax return, but it does not extend the deadline …. This means that you need to know how much tax you owe and be ready to submit payment by April 15, whether or not you are requesting a tax extension.”
Consider filing your taxes on time if you can
So your best approach is that if you can meet the filing deadline, but don’t have the funds to pay your tax bill, file anyway. The penalty for failing to file is usually more than penalty for failing to pay your taxes. If the IRS judges that you used the extension request simply to kick the problem down the road, your request for an extension could be denied and you could be faced with additional penalties for failure to file.
Setting up a time payment plan for taxes
The good news is that according to the IRS, you can work out a monthly payment schedule through an installment plan. You are eligible for an extended time payment plan if:
- you owe no more than $50,000 in individual taxes
- you owe $25,000 or less in payroll taxes if you run a business
- have filed all required tax returns
Other conditions apply
The not-so-good news is:
- Setting up a payment schedule is not free. The IRS currently charges $120 to set up a standard agreement or payroll deduction plan -- $52 for a direct debit arrangement.
- Any future tax refunds will be applied to your debt until it is paid in full.
- You must pay your minimum monthly bill when it is due.
- You must also file future tax returns and pay all your taxes in full and on time.
To recap
So April 15th is when the IRS expects you to file your tax return and settle your tax bill. File an extension request if your situation is so complicated that you need time to gather the information you need for a complete and well-documented return. Otherwise, file on time and pay what you can and pay the rest later -- with penalties. If you want to avoid most or all of the late penalties, work out an installment payment schedule. The IRS will work with you.
Turbo Tax and Do-It-Yourself VS. Professional Tax Preparer
Tax time brings a multitude of financial decisions, including whether to hire a tax professional or prepare your own taxes using software like TurboTax. While the low cost and advertised ease of do-it-yourself tax products may be tempting, they aren’t always what they claim to be. In fact, many tax filers find them frustrating and time consuming with very little actual cost savings. These drawbacks and increased stress often makes hiring a professional tax preparer a smart move.
The Dangers of Do It Yourself Taxes
When people consider using do-it-yourself tax filing software, they typically focus on the positives, like the low cost and ability to use them from their couch. However, these programs have quite a few negatives as well, which could wind up causing an audit, late penalties and even interest charges. Here are a few problem areas:
- They’re time consuming and stressful- Tax software promises to walk you through all the steps, but what happens when you don’t understand the steps? Online help systems and FAQs are often insufficient to help you understand what to enter. For example, health insurance premiums can be deducted in some instances but not all.
- You can enter any numbers into the return – The ability to enter any number into the software may seem like a good idea, but it can be dangerous. A higher charitable contribution amount or inflated IRA may get you a bigger return, but it can also get you into serious trouble down the line.
- You don’t know if you did it correctly – There are few tax topics that apply to everyone. Most only apply to some people in some cases. Many software programs don’t ask enough questions to find out if you are truly qualified for a deduction, for example mileage deduction for a vehicle.
- There’s no continuity- Even if you use the same tax program every year, it can make errors. Most programs say that they import information from the previous year, but would you know if they didn’t? Most people don’t and end up losing deductions or credits that they qualify for.
Big Box Drawbacks
Some people know that they don’t have the skills or patience to do their own taxes. However, to save on costs they go to a big box tax service like H &R Block or Liberty Tax Service. While the price may be right for these services, there are some things you should know. Primarily, they use untrained staff to prepare taxes. Most of their preparers have only taken a four to six-week course in taxes. They aren’t even required to have previous experience in accounting and rely on software programs to do most of the work. That means they aren’t any more knowledgeable than you are. In addition, many of these stores close on April 17th, which means they aren’t around if you are audited by the IRS.
Benefits of Professional Tax Preparers
Professional tax preparers have years of knowledge, advanced degrees and certifications, such as Master’s Degrees and CPA and EA licenses. Their experience and education is what will ensure that their clients get all of the deductions and credits that they deserve.
Here are a few more advantages that these tax professionals can put to work for you:
- They can often represent you if you are audited and help you handle collection matters.
- They provide tax planning to help you make tax saving decisions early.
- They spot opportunities to help you make smart tax decisions like converting ordinary income into capital gains.
- Their office is open year-round to answer your questions
At Dukhon Tax, we understand taxes down to a theoretical and statutory level, which is much better for our clients! Visit our website for a free, no obligation consultation! We even offer a special package for students!