Are you one of those people for whom tax time is nervous time, kind of like going to the dentist? You aren’t sure whether something unpleasant, like a cavity, is going to turn up? One way to reduce this anxiety is to know what the IRS requires of US citizens living and working abroad. Here are four things you should know at tax time.
Yes, you probably need to file taxes in the US.
Failure to file an IRS Form 1040 or other required forms can cost you a lot of money in penalties. To get a sense of what’s required, read the American Citizens Abroad (ACA) article “US Taxes Abroad for Dummies.” You’ll learn about income thresholds for filing US taxes, how the Affordable Care Act could affect you and much more. And are you familiar with FinCEN Report 114? If you are listed as a signer on one or more mission bank accounts, you should be. Learn why here: “Report of Foreign Bank and Financial Accounts (FBAR).”
No, you usually include all personal household expenses as ministry expenses.
The ACA article does say: “In some cases, you can exclude qualified housing expenses from your taxable income. This exclusion can be calculated using Part VI on Form 2555.” If you’ve never heard of Form 2555, you might want to check with a tax professional who specializes in preparing taxes for people living outside the US.
If you aren’t familiar with the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC), do your homework.
The ACA article explains why: “There are basically two methods by which you can reduce your US tax by a substantial amount. These are the "Foreign Earned Income Exclusion" and the ‘Foreign Tax Credit.’ However, neither of these methods excuses you from filing if your income was above the filing threshold.”
And it’s not as simple as just claiming the FEIE or FTC. Every person’s tax situation is unique. But it is good to know what’s possible: “By judiciously combining the FEIE with the foreign tax credit or by applying only the foreign tax credit, you can substantially reduce or even get your US tax bill down to zero.”
Finally, you should know when your taxes are due. According to Loren Gill, who specializes in preparing taxes for missionaries, several dates apply. One is the deadline for filing which can be as late as October 15 if you file for an extension using form 4868. Regardless of when you file, if you owe taxes, they’re due on April 15, so interest on those taxes begins accruing on that date.
Does this seem like a lot to think about? No need to get anxious. You have time to figure things out. “A person working out of the country on April 15 gets an automatic two-month extension to file their return,” Gill says, “making it due on June 15.”