Tips From an Expat Tax Expert: Mistakes to Avoid When Filing Taxes as an Expat

American citizens must be mindful of U.S. tax jurisdiction and the requirements for filing taxes as an expat. Shutterstock

Digital nomads—people who travel the world or live abroad while working (sometimes remotely)—may dream of watching the sunset from an ancient castle in Santorini, Greece, while knocking out a report. Or they may seek the enchanting beauty and serenity of Kyoto’s Arashiyama Bamboo Grove after finishing a workday in a nearby cafe. Unfortunately, the dream of living abroad and working from postcard-perfect locations too often becomes a financial dilemma for digital nomads who are U.S. expats. The already complex nature of filing U.S. taxes can become even more complicated. As an expat living abroad, you are required to comply with additional requirements and nuanced rules you may not be familiar with when filing taxes. The penalties for mistakes can be costly.

For these adventure-seekers, a life abroad comes with a long list of to-dos and challenges. Making an effort to understand tax laws, both in the United States and foreign countries, may be the last thing they want to do. However, being informed and proactive in managing tax obligations is crucial, according to Nathalie Goldstein, CEO and co-founder of MyExpatTaxes, a platform specifically for filing taxes as an Expat.

US Expats Must File a Tax Return With the IRS

“Many expats overlook the requirement to report income earned outside the United States,” Goldstein says. “This is particularly common among digital nomads or self-employed individuals who have U.S. clients, not realizing that their work performed abroad is still subject to U.S. taxes.” American citizens must be mindful of U.S. tax jurisdiction and the requirements for filing taxes as an expat. These regulations follow you anywhere in the world that you may go as long as you remain a U.S. citizen.

In 2020, the U.S. State Department estimated that nine million American citizens live overseas. A 2021 survey by InterNations says 48 percent of U.S. citizens living abroad work fully remotely. Only 20 percent work remotely at least 15 days out of a month. Another 16 percent work outside the office five days a month. InterNations is an organization founded to help global expats feel welcome wherever they land. Those numbers continue to rise thanks to remote work and an increasingly entrepreneurial Gen Z.

All U.S. citizens or those with green cards must follow the same rules for filing income, estate, and gift tax returns and paying estimated taxes. This is true regardless of whether they’re in the United States or elsewhere, according to the IRS.

For U.S. citizens, that means that income generated within the United States as well as income generated internationally, is subject to U.S. filing requirements. It does not matter where your residence may be at the time.

Potential Benefit When Filing Taxes as an Expat

There is one potential benefit for expats who may be stressing about the requirements for filing taxes as an expat. You get a little more time to pay your taxes than the average American citizen. Those living outside the United States and other expats qualify for a two-month extension to file and pay their taxes. The IRS gives Americans living and working overseas until June 15 to file if they meet one of two criteria:

• They must live and conduct most of their business outside the United States and Puerto Rico
• They must be serving in the military outside the United States and Puerto Rico

The filing extension is automatic. However, using it requires U.S. citizens to attach a statement to their tax returns. This is to prove that they meet one of the two criteria above. Remembering to include this with your filing is important to avoid late fees.

What if they aren’t able to file by June 15? The IRS also allows U.S. expats to extend their filing until October 15. Someone seeking this additional extension must file Form 4868 before June 15. They also must pay interest on taxes owed that aren’t paid by the regular due date for the tax return.

Tax Mistakes to Avoid When Filing Taxes as an Expat

Goldstein formed MyExpatTaxes after realizing the tax-filing challenges Americans living abroad faced. The expat and digital nomad lifestyle has exploded in popularity in recent years. In response, the number of expats feeling overwhelmed or confused about how to meet tax filing requirements properly continues to grow.

Beyond understanding the requirement to report worldwide income and pay taxes on it, Goldstein says Americans living and working in foreign countries typically make three other critical mistakes they should avoid. When filing taxes as an expat, utilizing a tax filing platform that specifically meets your needs is important to avoid potentially overlooking filing obligations that could lead to penalties later.

1) Overlooking Potential Refunds When Filing Taxes as an Expat

Trying to keep up with the tax laws in the United States and other countries can get complicated. This is true even when expats know they have to file a tax return. They may therefore be unaware of treaties that can keep them from being taxed twice on the same income.

Then there is the foreign earned income exclusion (FEIE) and the Foreign Tax Credit (FTC). These can offset an expat’s foreign-earned income, reducing their tax burden or eliminating it altogether.

“Missing out on refunds can happen if you’re unaware of all available deductions and credits,” says Goldstein. “It’s critical to seek out the necessary forms to secure the best possible refund for your situation.”

The challenge is that navigating the IRS requirements can be overwhelming. Goldstein shared that the MyExpatTaxes platform simplifies this process. It does so by taking out the guesswork and identifying what is needed to maximize your return potential.

2) Tripping Over Which Deductions or Credits to Take

Filing taxes in two countries involves a long list of forms. Because of this, it can be difficult for expats to decide which deductions or credits to take. On top of that, what impact they might have on one’s overall tax obligation? Digital nomads must think about where they get their income, the country where they claim residency or have a home, local tax regulations, and more.

“Deciding between the foreign earned income exclusion (FEIE) and the Foreign Tax Credit (FTC) can be tricky,” Goldstein says. “Note that opting for the FEIE means you won’t qualify for the child tax credit refunds. Our platform was designed to guide filers through these options, ensuring they select the best strategy and file correctly based on their unique circumstances.”

3) Misunderstanding IRA Contribution Eligibility

U.S. citizens and green card holders can keep any individual retirement account (IRA) they had before leaving the U.S. However, holding on to an IRA doesn’t necessarily mean they can continue to add contributions.

Unless they’re experts in international tax codes, digital nomads can easily find themselves in trouble with the IRS. According to the agency, American expats may be able to contribute to their IRA back in the United States only if they have income left over after taking deductions and exclusions.

“Expats often mistakenly contribute to IRAs despite restrictions on eligibility,” Goldstein says. “Most U.S. tax software and firms will not review if IRA contributions are made properly, leading to annual 6 percent excess contribution taxes from the IRS.”

Failure to Report Uncommon Assets

IRS officials also point out two additional issues digital nomads living and working abroad must consider. For one, they must report any foreign financial accounts they hold to the Financial Crimes Enforcement Network of the Treasury Department, even if the accounts don’t generate income.

You must report it properly to avoid legal consequences. This applies to any bank, savings, or financial accounts held with a non-U.S. financial institution. New expats who aren’t familiar with the tax code or using professional expertise to help guide them can often overlook this.

The second issue is virtual currency transactions with digital assets, such as cryptocurrencies and non-fungible tokens (NFTs). Many investors don’t realize that the income generated from digital assets is taxable. This is true for all Americans. However, the waters can become murkier when you hold digital assets in accounts based outside the country. All assets, regardless of where they are held, must be properly reported as well as any income generated from those assets.

Digital Nomads Should Put Tax Research Higher on Their To-Do Lists

Failing to file taxes or making mistakes on required forms could prove a costly mistake for digital nomads. Being declared delinquent by the IRS could lead to the State Department revoking an expat’s passport or worse. Tax liabilities also accrue steep interest and penalties for as long as they remain unpaid, making it increasingly difficult for a taxpayer to bring their account current after missing a filing period. The cheapest and most efficient way to avoid these pitfalls is always to be proactive in researching and complying with all requirements while seeking out guidance from experts.

To avoid these outcomes, travelers who are prone to wanderlust and have chosen the expat lifestyle should prioritize reviewing the tax laws that apply to their circumstances in both the United States and their current country of residence. Consider it cultural research.

By Deanna Ritchie

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.