Top tax tips for expats living in the U.S.

Kristin Nelson
Posted by Kristin Nelson
Wealth Management Strategy

As expats know, navigating a new culture, language, and the institutions of a foreign country is full of exciting and challenging moments.

An international lifestyle—as dynamic as it is—also adds a layer of complexity to the everyday issue of tax planning. To help you prepare for tax season, I’ve compiled a list of common myths we’ve dispelled and questions we’ve answered over the years while working with our expat clients.

Taxes don’t apply to me because I’m not a U.S. citizen. This is a common misunderstanding. If you earn money in the U.S., you’re required to pay U.S. income tax. For tax purposes, most expats meet either a green card test or what’s called a substantial presence test. With few exceptions, you will be taxed like all U.S. residents, according to a marginal rate.

In addition, you will be taxed on your global income including any dividends, interest, capital gains from foreign investments. Tax treaties between the U.S. and other countries are designed to help foreign residents avoid double taxation. There are a few exemptions for students, government workers, teachers, and athletes on special visas.

I can file for an extension to pay later in the year. Tax Day is Monday, April 15, 2019. Filing for an extension enables you to file as late as October 15, 2019.

However, that is simply an extension on filing your tax returns, not an extension on paying them. Paying after April 15 can result in the Internal Revenue Service (IRS) charging you late payment penalties and any taxes you owe accruing interest that must also be paid.

Haven’t there been a lot of changes to the tax law recently?  You said it! Changes affecting the 2018 tax season from the Tax Cuts and Jobs Act are extensive. Here are some key changes that may affect you:

  • One of the biggest changes includes a near doubling of the standard deduction for individuals and those filing jointly.
  • The child tax credit also doubled from $1,000 to $2,000 and the credit is also now available to higher income households. Married couples filing jointly with an income up to $400,000 can now qualify for the child tax credit, up from a previous income qualifying cap of $110,000.
  • Property and business owners also face a number of changes in the tax law. New limits on deductions related to mortgage interest and state and local taxes (SALT) may negatively impact property owners in high-cost, high-tax states like California and New York.
  • But there are also benefits for business owners that came out of the tax law changes. If you are either a sole proprietor, or your business operates as a limited liability corporation (LLC), a partnership, trust or “S” corporation, you may qualify as a pass-through entity and become eligible for 20% deduction on business income.
  • The new tax law also impacts charitable giving. The deduction limit for cash contributions to charities was raised to 60% of income from 50%, and eliminated the cap on the amount of charitable deductions high-income earners can claim in itemized deductions.
  • Taxpayers in high-income tax brackets with a commitment to charitable giving are also looking more closely at donor-advised funds, a tax-smart investment tool that’s becoming more popular. Making use of these funds enables you to bundle tax deductions over multiple years of giving into a single year and can help reduce exposure to capital gains taxes.
If something bad happens while I am in the U.S., I won’t have to pay any estate tax because I am not a U.S. citizen. This is false. You will have to pay U.S. estate tax for “U.S.-situs assets.” Broadly, that means property or assets located in or having a connection to the U.S. Because you are not a U.S. citizen, you will not be entitled to the $11.4 million life-time estate tax exclusion. This is true even if you are considered a U.S resident for income tax purposes. As an expat, you would be entitled to an exemption of $60,000 (this amount does vary according to tax treaties. Any amount of property above $60,000 would be subject to the U.S. estate tax.

To learn more about how we help international expats manage their banking, wealth management, and navigate the tax landscape, please contact us.

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The above article is for educational purposes only and should not be considered tax, legal, or investment advice. Please consult the appropriate professional regarding your personal situation prior to making tax, legal, or investment decisions.

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