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US TAX DEDUCTIONS FOR EXPATS

September 06, 2020

By Joshua Ashman, CPA & Nathan Mintz, Esq.

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Maximizing Deductions Can Optimize a US Expat’s Tax Return

For many US expats, the foreign earned income exclusion or foreign tax credits are sufficient methods to fully reduce the US taxation of your income. For certain expats, however, these basic methods are either not claimable at all or are not sufficient to reduce your US taxation to nil.

In such a case, tax deductions should be carefully explored to reduce taxable income to the extent possible. In this blog, we explore some of the more common tax deductions claimed by US expats to optimize their US federal income tax returns.

US Tax Deductions – Above or Below the Line

Tax practitioners often refer to tax deductions as either “above the line” or “below the line.” To put it briefly, above-the-line deductions refer to deductions that are used to determine your adjusted gross income (AGI), while below-the-line deductions refer to a further set of so-called “itemized” deductions that determine what portion of your AGI is taxable income.

Above-the-line deductions are claimable simply if you qualify. Below-the-line deductions are claimable only if you choose to itemize deductions instead of taking the standard deduction, which is a fixed amount that varies based on your filing status. For the 2020 tax year, the standard deduction is $24,800 for married filing jointly, $12,400 for single and married filing separately, and $18,650 for head of household.

US Tax Deductions That Are Above the Line

Common above-the-line deductions used by US expats include:

  • Interest on student loans (for qualifying institutions)
  • Higher education expenses (for qualifying institutions)
  • Contributions to a US health savings plan
  • One-half of US self-employment tax
  • Traditional IRA contributions*

*We note that in certain cases it may be recommended to forego the IRA contribution deduction (by filing Form 8606) in order to increase one’s “tax basis” in the plan and eventually earn tax-free distributions (this would be the case when sufficient foreign tax credits are available so that the deduction isn’t needed).

US Tax Deductions That Are Below the Line

Many below-the-line deductions were obsoleted by the Trump Tax Reform. Post reform, common below-the-line deductions used by US expats include:

  • Mortgage interest (including for a foreign residence)
  • Charitable contributions (generally limited to 60% of AGI)
  • Real estate and/or property tax paid (on a U.S. residence only)
  • US state and local taxes (limited to a combined total deduction of $10,000)
  • Medical expenses – premiums and copays

How We Can Help

If you’re a US expat who is curious about how tax deductions can reduce your taxable income, Expat Tax Professionals has a great solution for you – our very own online tax questionnaire!

When you fill out our questionnaire, we ask you about all the potential deductions available to US expats, so you can give us your full story, and then let us do the work of optimizing your tax return.

This is just one feature of our process designed to make your life easier when it comes to tax time. We understand that US expats are uniquely-positioned taxpayers with special filing challenges. From information collection to tax return delivery, we provide all the help you need to file an accurate and timely return.

Contact us to get started on your tax questionnaire today!

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AMERICAN TAX RATES FOR THE 2021 TAX YEAR

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REFUNDABLE TAX CREDITS

Two of the more common refundable tax credits claimed by expats are the child tax credit and earned income credit.

US TAX DEDUCTIONS FOR EXPATS

We explore some of the more common tax deductions claimed by US expats to optimize their US federal income tax returns.