You’re traveling the globe without a care in the world. That is, until April 15th rears its ugly head on your calendar. The date is ingrained in your memory along with your mother’s birthday, Christmas, and the day you lost your virginity. While tax day serves as a source of anxiety for many Americans, there’s no reason to let it distract you from your travels. This spring, don’t sweat the small stuff, and stick to our easy tips for filing taxes while traveling abroad:
1. Foreign Tax Credit
You escaped your dull 9-5 at home in the States, but you’re still required to pay taxes on money you earn overseas. Yep, as an American citizen you are required to pay taxes on your income whether or not it was acquired within U.S. borders. This means that in some cases, you could get stuck paying taxes twice (to the U.S. government as well as your current location’s government). However, you can claim the foreign tax credit to avoid getting the living daylights taxed out of you so you won’t be required to pay taxes twice in full.
2. Taxable Gains
Uncle Sam wants to know if you’re getting the most bang for you buck. Essentially, if you invest with a foreign currency that becomes significantly more powerful than the dollar, America requires that you report that gain. Take for instance, someone who makes an investment with euros to find that in several years time, the euro has become much more valuable than the dollar. While the price you paid in euros hasn’t changed, the value in the American market has. This disparity is known as “taxable gain.”
3. State Tax Return
Oh, America, you fickle country. Even though you don’t live in the U.S. of A, you could still be required to pay state taxes. It’s referred to as Nonresident State Income Tax and is up to the discretion of each state. Qualifiers vary between each territory and there are states that tax expats. Sometimes avoiding state tax is as simple as proving that you live somewhere else for the majority of the year. However, some states only wave their tax if the taxpayer can prove that they will no longer be returning to that state. To view the rules in your state, visit their Department of Revenue website (and cross your fingers).
4. Foreign Bank Accounts
Our culture frequently jokes about having money stashed in Swiss bank accounts or holed up with a banker in the Cayman Islands. Unfortunately, the IRS doesn’t find these little quips to be amusing. If you’re living abroad or simply have a bank account in another country, you are required to report that information the US government. There are two forms which US citizens are required to submit: The Report of Foreign Bank and Financial Account (FBAR) and the Statement of Specified Foreign Financial Assets (form 8938). The FBAR only needs to be filed if there’s more than $10,000 in the account and is purely informational (big brother likes to keep his eyes on you). Form 8938 is the U.S. government’s way of verifying that foreign institutes are reporting the correct numbers and to tax you on interest accrued abroad.
I’ve never met anyone who loved paying taxes. But with organization, knowledge, and a little chutzpah, paying taxes abroad doesn’t have t be so bad. Good luck this tax season, friends.