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When Taxes Due 2024

Navigating the complex landscape of tax duties can be quite a task for US citizens living abroad. To help simplify it, I've put together key tax deadlines in 2024.

The filing deadline for US tax returns for American citizens residing within the US is April 15, 2024.

American expatriates, get an automatic two-month extension for filing their tax returns. This pushes their tax filing deadline to June 15, 2024.

Some taxpayers (usually self-employed) need to make estimated quarterly tax payments. This requirement comes into play if you anticipate owing at least $1,000 in US taxes when filing your return.

For the 2024 tax year, the estimated payment deadlines are:

April 15, 2024
June 15, 2024
September 15, 2024
January 15, 2025

For more information please refer to the IRS website

U.S. Citizens and Resident Aliens Abroad

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion (FEIE) is a valuable tax benefit that is commonly utilized by U.S. expatriates. This provision enables eligible individuals to exclude some or all of their foreign earned income from being taxed by the United States. To take advantage of this benefit, specific criteria must be met, and the appropriate form, Form 2555, must be filed.

The FEIE serves as a means to lower the tax burden on income earned outside of the United States while living abroad. It should be noted that this exclusion does not apply to passive or investment income, such as interest, royalties, and dividends. Foreign earned income primarily includes salaries, commissions, and self-employment earnings derived from a foreign country.

There are two tests that individuals can fulfill in order to qualify for the FEIE: the Physical Presence Test and the Bona Fide Residency Test. The Physical Presence Test requires residing outside of the United States for a minimum of 330 full days within a given year. On the other hand, the Bona Fide Residency Test necessitates establishing significant ties to a foreign country, maintaining uninterrupted residency in that country throughout an entire tax year, having a permanent place of work or business there, and having no intention of returning to the United States.

If an individual is eligible for the FEIE, they can exclude up to $126,500 for the tax year 2024. Moreover, if both spouses meet either the Bona Fide Residency Test or the Physical Presence Test, they can each claim the FEIE.

Expatriates who incur foreign housing expenses may also have the opportunity to exclude or deduct these expenses. The Foreign Housing Exclusion is applicable to employees who have housing costs, such as rent, renter's insurance, and utilities. Self-employed expatriates, on the other hand, may utilize the housing deduction to account for their foreign housing expenses. The Foreign Housing Exclusion can be employed if the housing costs exceed 16% of the FEIE for that year, although higher limits may be applicable in most large metropolitan areas. The Internal Revenue Service (IRS) updates the list of higher limits on a regular basis.

It is crucial to recognize that the FEIE and the foreign tax credit are sometimes misused by less experienced tax preparers. However, if your foreign earned income is subject to high taxes in the country of your residence, it may be more advantageous to claim the foreign tax credit and file Form 1116. This alternative option should be considered carefully in order to optimize your tax situation.

Foreign Housing Exclusion and Deduction

For expats and U.S. taxpayers living and working abroad, the Foreign Housing Exclusion and Deduction allows to exclude or deduct rental housing expenses in a foreign country from their gross income on their U.S. tax return.

To qualify for the Foreign Housing Exclusion or Deduction, individuals must meet either the bona fide residence test or the physical presence test while residing in a foreign country.

The Foreign Housing Exclusion and Deduction are not the same thing. The exclusion reduces earned income used to pay for rental housing expenses, including amounts paid by employers as salary or wages. This exclusion applies regardless of whether the expenses are directly paid to the individual or on their behalf.

The Foreign Housing Deduction, on the other hand, is available only to qualified self-employed expats or digital nomads who meet the criteria under the bona fide residence test or the physical presence test. It's important to note that this deduction does not reduce the self-employment tax.

Let's delve deeper into the details of the Foreign Housing Exclusion and Deduction. Eligible housing expenses include those actually paid or incurred in a foreign country for the individual, their spouse, and their dependents while living abroad. It may also include payments aimed at equalizing taxes and education expenses for the taxpayer's children or dependents.

The following expenses can be excluded on a U.S. tax return:

Rent in a foreign country
Utilities (except for phone, streaming services, TV subscriptions and internet)
Homeowner's or renter's insurance
Property or leasing fees
Furniture and parking rentals
Rental repairs

There are limits to the Foreign Housing Exclusion and Deduction. The Foreign Housing Deduction is based on the actual housing expenses abroad, up to 30% of the Foreign Earned Income Exclusion (FEIE). However, this amount is reduced by a base housing amount equal to 16% of the FEIE, which represents the base housing cost for living in the United States. The computation for the exclusion or deduction can be found in parts VI, VIII, and IX of Form 255.

It's worth noting that the IRS provides a list of cities and their respective maximum allowable amounts in the instructions for Form 2555, adding further complexity to the process.

By meeting the specified tests and accurately calculating eligible expenses, individuals can potentially reduce their taxable income and maximize the benefits of this allowance.

Foreign Tax Credit

Expats and digital nomads who live and work abroad often find themselves obliged to pay taxes to both the U.S. and their host countries. To alleviate the financial strain of double taxation, the IRS permits the claim of a foreign tax credit if you are an individual, estate, or trust, and have paid or accrued certain foreign taxes to a foreign country. This claim is done by filing Form 1116.

Claiming the tax credit is not obligatory every year. However, to be eligible for the foreign tax credit, you need to meet the following four criteria:

The tax was imposed on you.
You either paid or accrued the tax.
The tax is a legal and actual foreign tax liability.
The tax is an income tax.

Calculating the foreign income tax credit can be intricate. The first step involves categorizing your income. The general category encompasses earned income such as wages and salaries, while the passive category includes investment income such as interest, capital gains, and dividends.

Each case is unique, but generally, to calculate your foreign tax credit as an individual, you must divide your foreign-sourced taxable income by your total taxable income before exemptions. Then, you multiply this number by your total U.S. tax obligation. The result usually represents your available foreign tax credit.

It's important to note that general and passive tax credits are calculated separately. Unused credits can first be carried back to the prior year and then carried forward for ten years.

Here is the basic formula for calculating your foreign tax credit:

Divide your foreign-sourced taxable income by your total taxable income (before exemptions).
Multiply the resulting number by your total U.S. tax due. The resultant number is your available foreign tax credit.
The difference between the foreign taxes paid and your foreign tax credit is used as a carryover credit that can be applied to the next year's taxes.

The actual calculation often involves more complexity. I am more than willing to assist you with this process.