US Exclusions and Credits
Flott and Co. PC prepares tax returns and advises US citizens living abroad on their US tax filing obligations. As part of its international taxation policy, the United States taxes US citizens on their worldwide income regardless of where they reside. Because of the unique nature of this citizenship taxation, US citizens living abroad often have different and complicated US tax reporting and filing obligations. The US is one of the few countries that imposes income taxes on non-resident citizens as part of its international taxation policies.
Our firm has extensive experience with and have helped many US citizens living abroad comply with their US tax reporting and filing obligations including compliance with the Foreign Bank and Financial Accounts (FBAR) and the Foreign Account Tax Compliance Act (FATCA).
While still subject to US taxation, there are two exemptions/credits available to US citizens living abroad to minimize their US tax liabilities. These are the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC).
The FEIE allows US citizens living abroad to exclude an amount of their earned income from their US taxable income. The maximum excludable amount is revised annually. The primary limitation of the FEIE is that it only excludes earned income and does not apply to other forms of income such as interest, dividends, and capital gains. So for US persons living abroad who earn a significant amount of their income from interest or dividends, there is little benefit to the FEIE.
In contrast, the FTC permits a US citizen living abroad to credit the income taxes paid to foreign countries against their US tax liabilities. However, the FTC is also limited. The foreign incomes taxes that are paid are sorted into categories based on what income the taxes were assessed against. The two primary categories are “general” and “passive” income. Passive income is interest, dividends, rents, royalties and similar income. The general category includes sources such as wages, salaries, income from an active trade or business and the sale of inventory.
Foreign Income taxes paid on a category of income, such as passive income, can only be credited against the US taxes on that same category of income. As a result, it is possible to have excess tax credits in one category while having not enough foreign tax credits to offset the US tax liability from another category of income. In addition, US citizens living in low tax jurisdictions may find that there is little benefit to the FTC since they pay minimal income taxes in that jurisdiction.
We assist our clients in understanding the process, complying with the US reporting obligations and ensuring that US persons living abroad use all of the exclusions and exemptions available to reduce their US tax obligations.
We also assist with tax and estate planning for US citizens living abroad. Such planning is unique because of the special rules that apply on transfers to non-US citizens, such as spouses, as well as treatment of foreign trusts and investments by the IRS. We recommend you to review the information provided on the websites below for an overview of filing obligations of all US citizens who live outside the United States.
For more on our international taxation services, visit our office or send us a message, and see what we can do for your specific international taxation concerns.
For more information, visit our affiliated sites: www.doingbusinessacrossborders.com, www.accidentaluscitizen.com and www.americanstaxedabroad.com. Our blogs contain helpful information on recent tax policies, provisions and amendments.