Whether you are a U.S. resident or citizen, a U.S. expatriate, or the owner of an international business, tax planning will likely benefit you or your business in more ways than one, possibly lowering what you owe the IRS.
Through tax planning, our tax accountants can identify methods to decrease your adjusted gross income (AGI), such as contributing to retirement accounts and lowering your taxable income by claiming deductions. This is especially important for expatriates who move abroad and are still taxed on their worldwide incomes by the United States. Utilizing tax credits can subtract from the taxes you owe, and many filers are eligible for several tax credits, like the earned income and child tax credits. Tax planning is only successful when filers also avoid penalties or fines associated with late submissions, and our tax accountants can prepare your returns by Tax Day, even if you live abroad.
For help from our tax CPAs, call US Tax Help now at (541) 362-9127.
The Goals of Tax Planning
With tax planning, we aim to determine how best to reduce your taxable income, claim deductions, and take advantage of tax credits to lower how much you owe the IRS while staying compliant with all its reporting requirements. This is particularly important for expatriates who live outside the United States but still have a tax obligation to the IRS, and after moving abroad, they might have gained a new tax liability to their foreign country of residence, increasing the risk of double taxation.
Decreasing Your Income
One important factor you need to keep track of when planning your taxes is your adjusted gross income (AGI). Your AGI impacts your tax rate, access to certain tax credits, and other tax issues. The IRS defines AGI as your gross income minus any adjustments to your income. Your AGI will increase when your income increases, requiring you to contribute more money to taxes.
One way to reduce your AGI is to contribute money to a workplace retirement plan like a 401(k). Your contributions to the retirement plan will reduce your wages and subsequently reduce your tax bill. While this method does not suit every individual, our tax accountants can personally work with you to discover a plan that is unique to your particular situation.
Taking Advantage of Your Tax Deductions
Tax deductions are another important part of tax planning. A deductible is an expense that can be subtracted from taxable income. Almost every person has at least one deductible expense, and if you own a corporation or other entity, you likely have several deductible expenses.
Deductible expenses include alimony payments, student loan interest, money put in an IRA, charitable donations, home mortgage interest, capital losses, business use of your car or home, and money put in a health savings account, as well as income, sales, restate, and personal property taxes. There is also the standard deduction all taxpayers can claim, the amounts of which depend on their filing statuses.
When you claim a deduction, the IRS won’t tax you on income used to pay for that deductible expense. Deductions can add up considerably, particularly if taxpayers identify all possible eligible deductions.
If you are a U.S. expat, you may have access to other deductions and exemptions that are not listed above. For example, an expat can be eligible for the foreign earned income exclusion (FEIE) when they pass the bona fide residence test or the physical presence test. If you qualify, you can exclude up to $126,500 for the 2024 tax year. The exclusion amount is per person, enabling married expats filing jointly to exclude up to $253,000 of their incomes from taxation while living abroad. The FEIE limit increases annually to adjust for inflation and other changes.
The money used for this exclusion can be earned from a U.S. employer, a U.S. corporation you own, a foreign employer, or an offshore corporation you own, provided you live abroad. It is important to note that if you earned your wages or salary from a U.S. company, you and the employer are subject to payroll taxes. However, if the wages are received from a foreign corporation, you can be exempt from payroll taxes under certain circumstances.
Another deduction that is available for expats is the foreign housing deduction. To qualify for this deduction, you must be a self-employed individual, a wage earner, or a salaried employee. Expats can claim this deduction in addition to the FEIE, which will increase their exempted income depending on how many deductible housing expenses they have. The country you reside in and other sections of the tax code will play a role in determining the allowable housing deductions.
By filing Form 2555 with the IRS alongside your annual tax return, our tax accountants can help you claim the FEIE and the foreign housing deduction.
Utilizing Your Tax Credits
A tax credit is a certain amount of money that can be used to offset one’s tax liability. Tax credits differ from deductible expenses because deductibles reduce taxable income, but they correlate with the taxpayer’s marginal tax rate, which may increase or decrease depending on their income. Tax credits decrease taxes without taking tax rates into account.
You can use tax credits for college expenses, retirement savings, and even for the adoption of children. Some of the most popular tax credits include the child and earned income tax credits.
According to the IRS, if you paid or accumulated taxes to a foreign country or U.S. possession and are still subject to U.S. taxes, you may be entitled to the foreign tax credit (FTC). Typically, only war profits, income, and excess profits taxes may qualify for the FTC. Additionally, if you have an unused tax credit, it may be possible to use those credits in future tax years for up to five years.
The FTC is such a useful credit for expats because it allows them to count taxes paid to a foreign country of residence to their U.S. tax liability. For example, if you paid the equivalent of $10,000 in income tax to your current country of residence, that $10,000 would be credited toward any taxes you might owe to the IRS after it assesses your taxable worldwide income. Some expats do not have to pay any taxes to the IRS after claiming the FTC. However, even if the FTC or other tax credits eliminate your liability to pay, you still have a liability to report and must do so by Tax Day by filing Form 1116 along with other tax forms.
Remaining IRS Compliant
Through tax planning, we can ensure you comply with IRS reporting rules and requirements while also using the tools available to us, like credits and deductions, to lower what you ultimately have to pay in taxes. Remaining compliant is crucial, as the IRS often imposes staunch financial penalties on taxpayers who violate rules, no matter where they live. Improper tax planning could lead to falsely filed returns or cause filers to miss out on tax perks that would lower or eliminate the taxes they owe the United States.
Filing on time is one of the biggest hurdles to remaining tax-compliant after moving abroad. The IRS appreciates this and provides a two-month filing extension for expatriates living abroad. If you still owe taxes after claiming the FEIE or FTC, interest will accrue on unpaid tax despite the extended filing deadline.
Certified Public Accountant Here to Help with Your Tax Planning Needs
For help from our tax CPAs, call US Tax Help now at (541) 362-9127.