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13 Tips for Expats in Prepareing Overseas Tax Return

Updated on May 21, 2010


Welcome to tax season again fellow expatriate. This is the yearly activity that I Cannot Stand!! But, if you are a Do it Yourself tax preparer then I have the utmost respect for you !

For United States expatiates around the world, I thought you might really appreciate some tips on how to prepare your tax return. Here is a list of the 13 most commonly made mistakes to avoid. Provided by

1. Foreign Earned Income: Most expats believe that the money they have earned overseas is below the max threshold limit that they automatically do not need to file a return. This exclusion can only be taken by filing a return and filling out for 2555. If not done timely you the expat will not be able to use it regardless of threshold.

2. Foreign bank accounts. Some people believe that since there money is not in a U.S bank holding and they are in a foreign country they do not need to report it. Wrong you need to fill out treasury form TD.90-221. Any United states Citizen who holds at least 10k in a foreign bank account must present this form.

3. Foreign tax credit. As a United States citizen you may also qualify for a foreign tax credit on your yearly taxes. But, you cannot take the foreign tax credit if you have excluded foreign earned income from the tax form. If all your earnings are excluded from the foreign tax a calculation can be made to take on your US tax return a credit for taxes pain on a non excluded foreign tax income. Lost yet? It gets better.

4. Inexperienced local tax professional. When out of the country Expats like to continue to use their local tax professional that they have been using for years. These relationships have over the years built trust and professionalism to each person. Once you have found someone you can depend on with your yearly takes or financings it’s understandable. It is very difficult to let another stranger at your information or monetary information. However expats need to let professional tax advisors is in the best interest if you have any doubts about doing it yourself. If you’re a new expat always good to get it done the first couple of times with a tax professional prior to doing it yourself because, of all the extra paperwork and laws that need to be followed. The local firm you have been dealing with will not have the experience or information needed to properly handle a expat tax return. Simply going to need a provider with a greater scope then the one you have locally.

5. a lot of expats still rely heavily on the IRS for help when completing tax forms overseas. While there is plenty of documentation to cover forms like 2555 and the 2555ez it is not a one fit solution for every expat. It also does not provide instruction or proper application of the tax code that might not fit a unusual situation that expats usually find themselves in.

6. DIY do it yourself. If you are the adventurous kind and are able to crunch numbers good then preparing your own return may be the best way as well. Expats are usually pretty bright and figure they can do their own taxes and figure it out. It is important to realize that the tax laws are always changing. Without being constantly connected to the professional aspect of the tax world, it is just too easy to put your trust in outdated information

7. State tax obligations. There are states in the union that do not completely comply with the US foreign tax exclusion. The expat should make sure that he/she does not owe any tax in their previous state of residence. Not following your state tax code wither can find the expat owing a little bit more then he would have if he had sought it out sooner.

8. Inability to locate tax documents. Expats after a long move have a tendency to be a little disorganized. The tax documents they need are not always there with in a arms reach. So if the IRS was to come auditing it is a good idea to keep them all even before you became a expat. The best way to have them all centrally located is a secure online storage system. This way you have the necessity to have access to them from anywhere in the world. It should be organized well by year and contain all your source documentation along with completed returns and correspondences with the IRS tax authority. In addition, keeping permanent hard copy files that document your service aboard and other elements of your financial world under lock and key is a good idea.

Still with me? Scary huh? This is not meant to scare but educate the future or current expat let’s keep going. J

9. Dependency exemptions. There are a multitude of exceptions that are available to Expats and they are not always aware of them all. If an expat has dependents that do not have a social security number they can still take the exception even if they do not have a social security number.

10. Hidden overseas accounts. Here is where it can get tricky. Can it be done? Yes. Is it legal? NO. it is fraud trying to hide assets in accounts overseas. Remember if you commit fraud it has no statute of limitations set on it. Penalties and interest can build up twice as much as what you would have originally owed. If the IRS really wants to get you can go to jail so just don’t do it.

11. Foreign housing exclusion. Exclusion is the foreign housing exclusion. Remember, you cannot take both the foreign housing exclusion and the foreign tax credit. So which one should you take? The eligible housing cost amount is the individual’s total housing expenses for the year (limited to 30 percent of the maximum foreign earned income exclusion amount), less the base housing amount (16% of the maximum foreign earned income exclusion amount). The excluded amount cannot exceed either the individual’s foreign earned income for the tax year or their actual housing expenses. The deducted amount also cannot exceed the individual’s actual housing expenses, nor can it exceed the individual’s foreign earned income for the tax year reduced by both the individual’s excluded foreign earned income and the excluded housing amount. Whereas, the foreign tax credit generally can be taken dollar for dollar of foreign taxes paid. So really depends on your own particular situation. Advise a tax professional if you are completely unsure.

12. Form 1040NR. Is a form not designed for US residents this form will be filled out for non resident aliens. They are determined by the IRS if they do not meet the green card requirements or the resident test of being on us soil more than 15 years. You can read more about this exclusion in IRS form 519.

13. No big financial picture. Perhaps these 12 tips have giving you pause in filling out your own tax return as an expat. If they did then I have one more for you that you really want to listen to. Don’t go it alone. It is important to have a guide when you are in uncharted territory. There is more to managing your taxes and financial history then preparing an accurate tax return. Give yourself a little less stress and seek out the help you need when you need it.

I hope you enjoyed the tips if you have any questions please visit my site at where we not only discuss taxes but every part of expat life that will help you get to where you are going and maybe even make your life a little bit easier overseas.


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