Reviewing Your Expat Tax Return
Double checking any US tax return has its difficulties. Reviewing an expat return, however, can be extremely complicated. An American expat tax return can reach scores of pages after all of the applicable schedules, statements and other documents have been attached. The majority of expatriates have their returns professionally prepared. This is a wise decision, but it can also be problematic. If you have your return prepared by a professional, you may remain ignorant of the process and be unsure of how to review your return (which you should do) before or after filing. This article will focus on the forms that are most common to expat tax returns and will give you the information necessary to successfully review these forms.
Front Page Form 1040
Form 1040 is the front page of your expat return. Please review this form to be sure there have not been any typos in your basic information (including your name, address, social security number and tax filing status). And speaking of filing status, many expats are under the impression that they are not allowed to file jointly with their non-resident alien spouse. This is not the case, and a tax identification number can be obtained that will allow you to file jointly. Of course, this means that you are submitting all of your non-American spouse’s income to the U.S. government for taxation. The benefit of this is a bigger standard deduction and the ability to claim the foreign earned income exclusion (for both of you).
When reviewing your information, be sure to review the information listed for your spouse and children. If you have children who are not Americans, you can claim them on your taxes by first obtaining a tax identification number for them as well. The tax benefits from children can be large, so don’t forget that you can claim your children until they are twenty-four (as long as they are enrolled in school) as long as they have either social security numbers or tax identification numbers assigned to them.
Read through everything on Form 1040 to be clear it makes sense with your life. Line 13 claims that you sold stocks and received a capital gain. Is this true? Line 7 reports your wages, does it seem that they have been accurately stated? Are all applicable deductions present and accounted for?
On the second page, double-check the amounts that have been withheld (applicable if your employer is a U.S. business). Money withheld from your paychecks is tax you have already paid, and it lessens your current lax liability.
Extremely important - if you have decided to have your refund (if you are owed one) deposited directly into your account, check the account and routing numbers you have provided. Because expat returns are so tricky, it might be necessary for the IRS to contact you regarding information on your return. Include your daytime phone number by your signature. This is a way of being open, upfront and cooperative with the IRS. It will be appreciated by the reviewing agent and will allow for a quick resolution of problems, it any are to arise.
Foreign Earned Income Form 2555
Probably the second most important form, in regards to your expat return, is Form 2555. This is the form that details the Foreign Earned Income Exclusion. If you are eligible, you will use Form 2555 to calculate the applicable foreign earned income and foreign housing exclusions. On the first page of this form, you will be asked very common and easily understood questions. Read through them and check the answers that are listed. If the bona fide residence test proves your expatriate status, be aware that every question in Part II has been completed. The dates on Line 14 will be especially important. Part II can be skipped, however, if you qualify as an expatriate under the guidelines of the physical presence test. In this case, Part III must be fully completed.
It is important to determine exactly how much of your income is “foreign earned”. This is done on Part IV. Carefully read through the questions and answers under Part IV to be sure the figures listed are accurate. Reading over a long list of numbers might tend to bore you a bit. But each and every number on Form 2555 is extremely important to your tax life as an expat.
Be sure to verify that the exclusion rates (in regards to your foreign housing) have been adjusted to your country of residence. The rates tend to vary from country to country. You should also double check the tax liabilities placed on your country by visiting the IRS website.
The exclusions granted to you as an expat are only valid if you have submitted Form 2555, and if you have submitted it on time. Even if you are completely sure that all of your owed taxes have been covered by your exclusions, the exclusions only apply to expats who have submitted Form 2555.
Simplified Form 2555-EZ
Form 2555 can be difficult to navigate. It is possible that Form 2555-EZ may be submitted as a substitute. This applies if you are not taking advantage of the foreign housing exclusion and if you do not work for yourself. If your preparer has filled out Form 2555-EZ instead of Form 2555, you have a much simpler task ahead of you in the reviewing. Still, don’t let the simplicity of the form work to your disadvantage. Review the form in its entirety to check for complete accuracy. Pay careful attention to the figure on Line 18. Be sure it is consistent with the number from Line 21 of Form 1040.
Credits and Form 1116
If you receive “credit,” your tax liability is lowered by that amount. It is easy to let credits go unnoticed, however. One of the reasons people, especially expats, hire professionals to do their taxes is to be sure they have taken advantage of every credit available to them. Credits are available for children, home improvement, higher education and a variety of other things. Check with a tax expert before assuming you have claimed all applicable tax credits.
Taxes paid to a foreign country earn you credits with the U.S. government. This credit is applied by way of Form 1116. It is important to note that you are not able to claim a foreign tax credit on amounts already deducted from US earned wages. You are also unable to claim the foreign tax credit in tandem with the foreign housing exclusion. Foreign taxes are complicated! Be sure that your tax preparer is skilled in expat tax law. You may have multiple 1116 forms, if your taxed foreign income comes from various sources. Be sure to check each form, separately, for accuracy. 1116 is notoriously confusing, but it is still important to have seen and reviewed your tax information personally.
This was a basic overview of how you should review your expat tax return after it’s complete. By educating yourself and hiring an expert expat tax professional you can make sure that you return is prepared professionally and accurately. Since living abroad presents enough challenges, saving every tax dollar and avoiding the problems of incorrectly filed returns is of the utmost importance. For help with these matters, contact the professionals at Taxes for Expats today!
IJ Zemelman, EA s the founder and tax operations director of Taxes for Expats
She may be reached at questions@taxesforexpats.com or +1-646-EXPAT-US
Web site: www.taxesforexpats.com