10 Tips to Prepare for the Upcoming Tax Season as US Expat
We are in the midst of the holiday season, and a new year is upon us. A new year means tax time. The best way to have an easy tax season is to prepare for it now!
Ines Zemelman, EANov-30-2015
Sure, the last thing you want to think about this holiday season is your taxes, but it’s the perfect time to make last minute moves and preparations. You can increase your tax refund by performing a few simple actions right now before the year is over. While you’re working on optimizing your tax refund, you can take a few extra steps to prepare for the upcoming tax season so the process of filing your US income tax return runs smoothly.
1) Take the time to prepare your documents, local tax forms and bank statements in one convenient place.
It may seem a bit early to start gathering your tax documents for next year, but the end of the tax year is the best time to begin compiling everything you will need to have a hassle-free tax filing experience. Preparing everything now will make sure you don’t forget anything. Create a file specifically for the tax year, and put everything inside. When the time comes to file your US tax return early next year - you will be prepared.
For an overview of the documents we advise Americans living abroad to have, please see: Documents we need to prepare your US expat tax return.
Also have a think about all the changes that took place during the year. Did you have moving expenses related to changing your job location? Did you have any unreimbursed employee expenses? Did you have to pay for child care? These and other situations will allow you to take even more deductions.
2) Spend your FSA (Flexible Spending Account) if you have one, and postpone your annual bonus if you’re expecting one. If you have a bonus coming from your employer at the end of the year, ask to have the bonus deferred until next year (if you’re not in need of the extra cash this year). That way, it won’t count against your taxable income for this year.
If you have an FSA, it’s best to spend the remaining money in the plan by catching up on your medical maintenance. Your account may not be a case of ‘use it or lose it’, but if you have any money left over, you may only be allowed to carry up to $500 over with you into your 2016 FSA. Another scenario you may find is that your plans will only limit the allowable timeframe to use your balance to 2 ½ months after the year in which the plan was held.
3) Accelerate your deductions instead of waiting until next tax season to reap the benefits.
There are a variety of deductions available to you for spending money. Among these is your mortgage interest. If you make an extra payment on your mortgage before the end of the year, you will be able to deduct that mortgage interest, as well. Note that foreign mortgage works as well - for full details please see: Foreign Mortgage Deduction.
4) Consider making a charitable donation to a qualifying charity.
It’s time to dig deep into that closet and find clothes that you haven’t worn for a while. Clothing is a great donation, and you will be able to deduct it on your US income tax return. You may also have a variety of household goods that you can donate…it all adds up! Remember when you’re donating goods, you must make a list of the items you’re donating in order to have a verifiable record.
You can also make a cash donation by using a credit card. You don’t have to pay off the card until next year to be able to claim the donation on your US income tax return. Have you volunteered your time at an IRS qualified charity? If so, you can deduct your mileage at $0.14 a mile.
Speaking of donations…are you ready to turn in your old car and get a new one? If you don’t get an acceptable offer on your car as a trade-in, consider donating it and taking the deduction instead.
Although every charitable donation is a blessing to the giver, from the IRS standpoint you can take deductions only for those given to an IRS qualified charity. Aside from that, you can deduct donations made to charities in three countries: Canada, Mexico and Israel.
5) Consider taking a class to increase your knowledge and take advantage of a substantial Lifetime Learning Credit.
You can get a credit of up to $2K by going to school and claiming the Lifetime Learning Credit. Make sure to pay for next quarter’s tuition prior to December 31 so you are able to claim it on your tax return.
6) Add to your retirement plan now to not only invest in your future, but also to defer taxes until you start receiving distributions.
You can reduce your taxable income while setting aside funds for your retirement by making an extra contribution into your retirement savings plan. It doesn’t matter whether you’re making contributions to a traditional IRA or a 401(k); you are allowed to take a dollar-for-dollar reduction in your taxable income. The contribution limits for 2015 are:
●401(k) under 50 years of age: $18K
●401(k) over 50 years of age: $24K
●Traditional IRA under 50 years of age: $5,500
●Traditional IRA over 50 years of age: $6,500
NB: If you live abroad and claim the Foreign Earned Income exclusion, postpone contributions to the traditional IRA or ROTH IRA until the time when you have a preliminary draft of your U.S. tax return for 2015. We recommend you contact us in early 2016 to prepare a draft for you and we can tell you exactly how much you can contribute.
- Contributions towards the prior year made between January 1 and April 15 of the following year are still deductible.
- If you make contributions early, before you know how much you can deduct considering the Foreign Earned Income exclusion - you may end up having excess contributions.
7) You can take your losses on your capital gains and sell some losing stocks to offset your gains for the year.
If you are an investor, unfortunately, the odds are pretty high that you own some stocks that have gone down in value since you acquired them. If this is the case, you can realize your losses by selling off your diminished investments and count them against your taxable income. If your losses wind up exceeding your gains, you can only apply $3K against your taxable income in one year. Any extra losses will be passed on to the next tax year.
8) If you’ve recently had a baby, be sure to file for a social security number for the little one.
A child can bring your sizeable credits and deductions such as the child tax credit, the dependent exemption, and the earned income tax credit. In order to qualify for these credits and exemptions, however, you will need a social security number for your little bundle of joy. Make sure to get in touch with the Social Security Administration as soon as possible.
9) If you have moved from a country with high tax rates to another country with low tax rates or a tax-free country, try to postpone payment of your final tax bill until the following year.
If your earned income remains the same or increase, while you pay less tax in your country of residency, you may find yourself short on foreign tax credit offsetting U.S. taxable income. You may have an unpaid final tax bill from your former country of residency (i.e. Australia), and an option to pay this bill after December 31 without penalties. If this is the case, do not send the check before January 1. Then you will be able to add this payment to the amount of foreign tax paid (for 2016) in the low tax country and increase your foreign tax credit.
10) If you experienced any changes with your income over the past year, you may need to adjust your W-4 withholding.
If you receive income from a U.S. employer, you may need to review and make adjustments to form W-4 to ensure the correct amount of tax is withheld. Such review is particularly important if you anticipate a change in residency, i.e. returning from a foreign job assignment to the United States or changing your U.S. home of record.
Ines Zemelman, EA is the founder of Taxes for Expats