Tag Archives: Money

Living in a foreign country holds a lot of appeal. It gives an exotic impression and seems like a never-ending vacation. But it doesn’t matter where you go, because the US government still expects you to file a tax return and pay taxes. This is true even if you become a citizen of the other country and live there full time. 

Income Tax Requirements Abroad

The United States might be the only country in the world that does this.

If you were a citizen of Italy but living and working in Argentina, Italy wouldn’t expect you to pay any taxes! You would have to pay them in Argentina, though. The US would expect you to pay both.

For your peace of mind and to keep you out of jail, become familiar with the income tax rules that apply to you as a citizen of the United States living outside the country.

Income tax rules for US citizens living abroad:

  1. No matter where you live, you must file a tax return. It’s entirely possible that you won’t owe any taxes, but you must file an income tax return each year.
  2. You’re still subjected to all US tax laws. This includes income tax rates and the same credits and deductions.
  3. There are 2 primary ways to reduce your taxes owed in the United States. The United States has a reputation for double taxation, but in practice that only applies above certain income limits.
  • Foreign tax credit: This credit is intended to protect American citizens from paying taxes twice on the same income. In essence, you can deduct any income taxes you’ve paid in the foreign country from your taxes owed in the US. There is a limit, however.
  • If you paid $12,000 in foreign taxes, you could reduce your US tax bill by $12,000. Simple enough.
  • Income exclusions: This is the other option. You can’t claim both. The income exclusion allows you to reduce your gross income by up to $97,600. You can also subtract housing costs up to a maximum amount.
  • As an example, if you earned $100,000 in a foreign country, your taxable income would be only $2,400. It would be even less after the housing cost credit.
  • The housing credit is equal to the cost of housing minus $15,216. The maximum is 30% of $97,600. If your housing costs were $25,000, you could claim an additional deduction of $9,784 from your gross income.
  • Self-employed folks are not eligible for this housing exclusion.
  1. Any gross income above and beyond these deductions will likely be taxed in both countries. Those with significant incomes can expect to have a portion of their income double taxed.

Many wealthy and not-so-wealthy people are choosing to renounce their US citizenship. In many cases, this is due to the tax situation. Over 3,000 people did exactly that in 2013. Even if you don’t owe taxes, the cost to have your income tax return prepared in a foreign country can range from $3,000 to $7,000! That’s a lot of to pay, especially if you’re under the income limits.

The laws surrounding the reporting of foreign investments and bank accounts are very arduous. The banks themselves have to report your accounts. You also have to individually report each account holding $10,000 or more

It’s important to file your US tax returns. The penalty for failing to file while living abroad starts at $10,000 and can go as high as $100,000. This can be true even if you don’t owe any taxes. 

If you’re under the income limit, your US tax bill is likely to be zero. However, the cost and hassle of filing that return can be significant.

One thing is for sure: file your US tax return, no matter where you reside!

Have you thought about the timing and tax issues of when your children will receive their inheritance from you?

Financial experts are saying that due to steadily rising life expectancies, many of us will live into our 80s and 90s, and your kids are likely to be in their 60s or 70s before receiving their inheritances. 

Would you like to pass along some assets before they reach this age?

Fortunately, you don’t have to die to be able to give them portions of their inheritance.

Consider these suggestions for some tax-advantaged strategies for passing along assets while you’re alive:

  1. Talk with your children about starting education savings for each of their kids. Many states offer savings plans that grow tax-free. Some of these plans even allow kids to use their education dollars at a university in another state.
  • The sooner in your grandkids’ lives you set up the education accounts, the more money those accounts will accumulate because they’ll have a longer period of growth.
  • In the event you wish to give the money directly to a university, you don’t have to pay a single bit of taxes to do it.
  1. Give your kids “gift” dollars each year. Whether it’s for their birthdays, Christmas, or May Day, you can give each of your children up to $14,000 yearly (as of 2013) tax-free. In fact, you can give up to that amount to as many people (related or not) as you like without you or them being taxed on that money.
  • Consider how your children in their 30s could use the money when they’re working so hard to raise young families.
  • Can you imagine the joy, pleasure, and perhaps stress-relief you can give to each of your kids by making some generous gifts now, without anyone paying any taxes on the gifts?
  1. Pay for expected medical costs. If you have children or grand-children that will always need a special type of medical care, give some money to the medical facility. This way, you’ll avoid having to pay any taxes on the money you give, no matter how large the amount.
  2. Use your life insurance cash value. You can borrow money, tax-free, against your life insurance cash value and give it to your children. The government doesn’t tax those borrowed funds, regardless of the amount you take out of your policy.
  • Your kids will also receive the funds tax-free as long as each gift is below the IRS limits ($14,000 in 2013).
  • As long as your policy stays in force, those funds remain tax-free to you. You don’t need to ever pay them back if you don’t want to. Upon your death, your heirs don’t have to pay those dollars back to the life insurance company, either. The policy will cover the loans.
  • Keep in mind, though, that the loans will reduce the death benefit to your beneficiaries. So taking out the loans is giving your children some funds now instead of later.

When you give now to your heirs, you’ll also reduce your overall assets that may be taxed upon your death.

Everybody wins:

  • You get to see the looks on their faces when you gift a large amount of money.
  • Your heirs get to use the money now, when they might really need it.
  • Your heirs will pay fewer taxes and retain more of the assets upon your death. 

Surprise your children by gifting some of their inheritance tax-free now, when you can all enjoy the special time together!

If you’re self-employed, there are many deductions available to you that the average person without a business can’t take advantage of.

In fact, if you don’t have a small business, you might consider the many financial benefits of starting one. Simply making an honest effort to earn income from what is normally just your hobby can open up a lot of tax advantages, even if you keep a regular full-time job.

Consider these tax deductions:

  1. Home office. Whatever percentage of your home is used for business can be used in deductions from your income. For example, if your rent is $1,000 / month, and you use 30% of your square footage for business, you can deduct $3,600 from your income (12 x $300).
  • The catch is that the space must be used exclusively for business. So, if your parents sleep in your office on Christmas Eve, you lose out on the entire deduction. The IRS is a real stickler on the home office deduction.
  • Your computer can be deducted as well, also based on percentage. If you use your computer 50% of the time for business, you can deduct 50% of the cost.
  • You can also deduct the same percentage of your utilities. That includes, heat, electricity, Internet, and more.
  • Even a portion of repairs to your house can be taken as a deduction in the same percent. It must be a repair that affects the whole house, like a new roof, air conditioning system, or flooring.
  • Of course, any money you spend on renovating your home office is also deductible from your income.
  • You can even deduct your child’s allowance by paying them to do age-appropriate tasks around the office like sweeping, dusting, and filing.
  1. Travel expenses. You can deduct your business-related travel expenses, like hotel and air-fare. You can also deduct 50% of the cost of your meals on your business trips or even business meals in your home town.
  • It’s vital to keep a journal so you can prove that your travel was business related. 
  • You could even have a working vacation and take the family along. You won’t be able to deduct their travel or food costs, but you can still deduct the cost of your hotel room. Of course, if your family members work for you, it’s a moot point!
  • If you are also vacationing, be sure that you’re spending at least part of the time meeting with clients, going to training, or on other business-related tasks. If you only spend 2 hours out of a week on business, you’re asking for trouble. Be reasonable.
  1. Automobile. If your vehicle is used exclusively for business purposes, you can typically deduct all your vehicle expenses. In most cases, your vehicle will be used for both business and personal use, so keep a log of your mileage, designating each trip as personal or business.
  • In general, all travel between business locations is deductible. So, travel from your home office to the office supply store would be deductible. Travel from one client location to another would be tax deductible.
  • However, the miles you drive to your office from your home are not tax deductible, if your office is located away from your home.
  • These deductions can be used by mileage or business use percentage. If you use your car for business purposes 30% of the time, by mileage, you can deduct 30% of your vehicle expenses. Or, you can multiply your business miles by that year’s designated amount from the IRS.
  •  Use whichever method provides the greatest deduction. Typically, less expensive cars would use the mileage method. For more expensive cars, the percentage method provides a larger deduction. Try it both ways.

Having a small business on the side can bring many useful deductions. Just a few are mentioned in this article. With a little planning, a significant portion of your rent or mortgage, utilities, automobile, and travel expenses can be deducted. This can easily save you thousands of dollars every year.

Maybe now is the time to turn that hobby into a business. You might even make some money and have a lot of fun at the same time. Consider it!