Top 4 things families moving abroad should know about US expat taxes
When you move your family overseas, there are dozens (hundreds!) of things to consider. But one of the most important considerations often goes undetected: US taxation. So let’s take a look at the 4 most important things you need to know about how US expat taxes impact your family abroad.
1) Save money with the Foreign Earned Income Exclusion
While you need to file a US tax return each year you are abroad, you can exclude $99,200 of your foreign earned income from US taxation for the 2014 tax year (and $100,800 in 2015). If your spouse is earning foreign income, s/he can also use this exclusion, even if you are filing jointly. However, you must qualify via one of two residency tests to do so: the Physical Presence test or Bona Fide Residence test.
Since the Bona Fide Residence test requires you to live abroad for at least one year with no plans to return, many families moving abroad qualify by the Physical Presence test. This test requires you to be inside a foreign country for 330 of any 365-day period (not a calendar year). Time spent in the air doesn’t count towards those 330 days, so track your time carefully if you are traveling frequently to ensure you qualify!
2) Should you include your child on your tax return?
Pros: The most obvious advantage to including your child(ren) on your return is the financial benefit. The additional exemptions provided for each dependent, as well as perks such as the Child Tax Credit, may make this decision a great financial choice for you.
Cons: When you include your child on the return, this is an indication to the IRS that the child is indeed a US citizen. From this point forward, your child is a US citizen with US tax filing requirements and the child’s worldwide income is open to US taxation—even if this child was born abroad. Although there is likely no income attributable to the child at this point, the reporting requirement remains, waiting for them to start earning!
If you have been including your child(ren) on your US tax return prior to the overseas move, you should continue including them for the tax deductions—at this point, they are already a recognized citizen with reporting requirements.
3) Their investments may be taxed, too.
As a US citizen, your child will have a reporting requirement to the IRS in regard to interests in foreign trusts, partnerships, companies, bank accounts, mutual funds, properties, etc–even if the investments are not income generating or not even wholly owned by the “child”. Furthermore, foreign financial institutions are required to report on the accounts of their American clients to prevent citizens from hiding money abroad. Because of this additional expense and hassle, many foreign financial institutions will not provide banking and financial services to US citizens. Thus, reporting a child as a dependent may also impact his/her future investment and financial options.
4) Can/should you renounce the citizenship of your child?
Actually, you cannot renounce on behalf of your child, even if they are a minor. Renunciation is considered a very personal decision that the child must make for themselves. So if you choose to include your child on your return, s/he may be “stuck” as a US citizen, even if both parents renounce their own citizenship.
While there may appear to be more cons than pros to adding your child to your US tax return, this is truly only a potential issue if your child chooses to work and live abroad as an adult.
Sponsored post by Greenback Expat Tax Services
This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat tax returns for Americans living abroad. If you’d like Greenback to prepare your US expat tax return, simply visit www.greenbacktaxservices.com for more information.