US Expat Tax Deductions and Credits

For Americans living abroad, tax season can be complicated. On the plus side, you can generally claim a broader range of tax deductions and credits than most Americans. To help you understand your rights, we’ve compiled a list of some of the most common expat tax deductions. 

1. Standard or Itemized Deduction 

Just like any US citizen, Americans living abroad can claim the standard deduction or choose to itemize their deductions. Let’s look at both options. 

Standard Deduction 

The standard deduction amount will depend on your filing status and age. 

For the 2023 tax year, the standard deductions are as follows:  

Itemized Deduction 

• Medical/dental expenses – Needs to exceed 7.5% of the AGI threshold
• State and Local Taxes you paid – $10,000 limit for MFJ, $5,000 for MFS
• Interest you paid – Mortgage interest on primary and secondary homes 
• Gifts to charity
• Casualty and theft losses – Only Federal Disaster Losses are allowed
• Other miscellaneous deductions

Determining whether to opt for standard or itemized deductions is a complicated decision. You’ll want to be sure you are taking advantage of the most significant tax deduction available, and you also don’t want to spend unnecessary time putting together itemized deductions if the standard deduction is a better option for you.

Consult a qualified tax professional to review your options.

2. Foreign Earned Income Exclusion 

The Foreign Earned Income Exclusion (FEIE) is a deduction that allows you to exclude the first $120,000 for the 2023 tax year. To qualify for the FEIE, you must meet either the Bona Fide Residence Test or Physical Presence Test.

Earned income typically includes only salary or self-employment earnings. Unemployment earnings and passive income do not qualify for this exclusion.

Self-employed individuals should note that the FEIE is applied to income taxes. It is not applied against self-employment tax, which is generally 15.3% of your business profits. 

Once you claim the FEIE on a tax return, you must continue using it on subsequent returns for which you qualify. Not claiming it in future tax years may disqualify you from taking it for 5 years or more.

Bona Fide Residence Test 

According to IRS Pub 54, which explains most of the expat rules, you meet the bona fide residence test if you must:

• Have lived abroad for a full calendar year before you can apply, so this is not an option for first-year expats.
• Be a US citizen or US resident alien who is also a citizen of a country that the US has a tax treaty with
• Not be working abroad for a fixed amount of time – such as a 1 or 2-year contract.
• Illustrate through your actions that you truly live overseas with no intentions of returning to the US. You can do this by having a long-term residence, local bank accounts, ties to the local community, and a permanent job.

The IRS grants an extension to January 31st of the year following the regular due date of your tax return by filing Form 2350. This allows you to qualify for the Bona Fide Residence test while filing your tax return promptly. 

Physical Presence Test 

You might qualify under the Physical Presence test for purposes of the FEIE if you spent at least 330 days outside of the US during any 365 periods that either started or ended in the tax year, and your Tax Home must be in a foreign country. Tax home can be a bit tricky, but generally speaking, it is where you work – so if you work overseas, even if it’s for a US company, then you would qualify.

Let’s say you moved out of the US on February 1st, 2023. Then, if we add that you had 30 days of travel to the US from February 1st, 2023, to February 1st, 2024, you would qualify.  

Please note that the Physical Presence Test is all or nothing – if you are inside a foreign country for only 329 days, you will not qualify. You must be inside a foreign country for a full 24-hour day that starts and ends at midnight for 330 days. Time spent on international waters or flying over international waters does not qualify (although if you fly over another country’s air space, it may).

Like the Bona Fide Residence Test, your maximum exclusion is prorated based on the number of days inside a foreign country divided by 365. So if you are doing a split year – Say July 1 – December 31st in one year you would have 184/365 = 50.41% of the FEIE you could utilize.

3. Foreign Housing Exclusion 

The Foreign Housing Exclusion is an addition to the FEIE that is available to individuals who have Employer-provided salaries, i.e., not self-employed individuals. Self-employed individuals can use the Foreign Housing Deduction.

To calculate the amount of your FHE, you must first calculate the base amount, which is set annually at 16% of the FEIE. So as the FEIE increases with inflation, so does the FHE.

How to Calculate the Foreign Housing Exclusion

1. Calculate the Base Housing Amount: The base housing amount is 16% of the maximum Foreign Earned Income Exclusion (FEIE). For 2023, the FEIE is $120,000, making the base housing amount 16% of that, which is $19,200.
2. Determine the Maximum Foreign Housing Exclusion (FHE): The maximum FHE is generally 30% of the FEIE. For 2023, this would be 30% of $120,000, equating to $36,000. However, this limit can be higher for specific high-cost locations. You can find these specific limits in the instructions for IRS Form 2555.
3. Calculate the Maximum Exclusion You Can Claim: Subtract the base amount from the maximum FHE or the specific limit for high-cost locations. For example, using the standard limit for 2023, it would be $36,000 (maximum FHE) minus $19,200 (base amount), resulting in $16,800.
4. Determine Your Daily Exclusion Rate: Divide the maximum exclusion amount by 365 to find your daily exclusion rate. For the standard limit, it would be $16,800 / 365 = about $46.03 per day.
5. Calculate Your Total Exclusion Based on Days Abroad: Multiply your daily exclusion rate by the number of days you were abroad. For instance, if you were abroad for 345 days, it would be 345 days x $46.03 per day = approximately $15,880.35.

Housing expenses include:

• Small out-of-pocket repairs
• Utilities (other than telephone charges)
• Real and personal property insurance
• Nondeductible occupancy taxes
• Nonrefundable fees for securing a leasehold
• Rental of furniture and accessories
• Residential parking

Housing expenses do NOT include the following:

• Expenses that are lavish or extravagant under the circumstances
• Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation)
• The cost of buying property, including principal payments on a mortgage
• The cost of domestic labor (maids, gardeners, etc.)
• Pay television subscriptions
• Improvements and other expenses that increase the value or appreciably prolong the life of a property
• Purchased furniture or accessories
• Depreciation or amortization of property or improvements

4. Foreign Tax Credit 

If you earn money overseas and you pay or accrue tax locally on that money, then you can utilize the Foreign Tax Credit (form 1116). The FTC allows you to tax a dollar-for-dollar tax credit on your US taxes for amounts that you have paid or accrued to a foreign government. So if you paid the UK $20,000 in taxes, then you can reduce your US tax bill by that same $20,000. The FTC is most helpful for individuals who live in high-tax countries – such as those in Western Europe or for individuals with unearned income – such as overseas rental properties.

If you use the FEIE as previously described, you cannot claim the FTC on the same income, although you can use both forms in one year. Say you have a day job in France, but you freelance on the weekends. You could use the FTC to offset the income from your tax job, which you pay tax on locally, and you could use the FEIE to offset the US income tax on your freelance work. However, certain cases may make more sense for you to claim the FTC than the FEIE (see Child Tax Credit below).

The FTC is a non-refundable tax credit which means that it can reduce your US taxes to $0, but the IRS will not refund you the excess credit. The excess amount is carried back one year and carried forward upwards for up to 10 years.

5. Child Tax Credit 

The Child Tax Credit has both a non-refundable and a refundable element. Starting with the 2022 tax year, individuals with children under 17 years of age can claim a credit of up to $2000 per qualifying dependent, and $1500 of that may be refundable. In order to qualify, you cannot claim the FEIE, and you must have earned income to claim the refundable portion.

To be eligible for the child tax credit, a child must meet all of the following requirements: 

• Be a qualifying child (son, daughter, stepchild, foster child, sibling, half-sibling, grandchild, niece, or nephew) 
• Be under the age of 17 at the end of the tax year 2023
• Be claimed as your dependent on the tax return 
• Have provided for less than half of their own support during the year 
• Lived with you for more than half of the year 
• Be a US citizen, national, or resident alien.
• Have a valid SSN or Adoption Taxpayer Identification Number (ATIN) 

If you are Married and Filing Jointly, your modified adjusted gross income must be below $400,000 to qualify, and this number drops to $200,000 for all other filers. If your income is over $400,000 for MFJ or $200,000 for everyone else, then the credit amount is reduced by $50 per additional $100,000 of income until it is eliminated when you hit $500,000 or $300,000, respectively.

6. Educator Expenses Deduction 

Educators of children in elementary and secondary schools (kindergarten through 12th grade—or the overseas equivalent) may take up to $300 of deduction on their tax return for school supplies and equipment paid for out of pocket. This deduction is taken directly on your tax return, Form 1040.

7. Child and Dependent Care Credit 

If you paid a person or organization to care for your children or other dependents (such as grown dependents with special needs or elder care) so that you could work or look for work, you might be able to take credit for some of the expenses paid.

For the 2023 tax year, the credit amount is $3000 for one qualifying person and $6000 for two or more qualifying people. The maximum credit is 35% of your employment-related expenses. Note that once your Adjusted Gross Income is over $43,000, the maximum credit drops to 20% of your employment-related expenses.

A qualifying person is a) your qualifying child, who is your dependent and was under age 13 at the time the care was given; b) your spouse who wasn’t physically or mentally able to care for him/herself and lived with you for more than 50% of the year, c) A person who was not physically or mentally able to care for him/herself or, lived with your for more than 50% of the year and either was your dependent or someone who would have been your dependent except that they 1. Received gross income of $4,400 or more, 2. Filed a joint return, 3. You or your spouse could be claimed as a dependent on someone else’s 2022 return.

8. Individual Retirement Account (IRA) Deductions 

Individual Retirement Accounts (IRAs) are generally used to plan your retirement. These are not employer-sponsored retirement plans (i.e., a 401k). There are two main types of IRAs: Roth IRAs and Traditional IRAs. The main difference is that with a Roth IRA, you put in AFTER-tax money and when you take money out it is TAX-FREE; with a Traditional IRA you put in BEFORE-TAX money, and when you take it out it is TAXED as regular income.

To make an IRA contribution, you must have earned income reported on your tax return. The limit you can contribute per taxpayer to an IRA for 2023, which can be done until April 15th, 2024, is $ 6,500—unless you are over 50 years old, and $7,500 if you are over.

Roth IRA 

A Roth IRA is a retirement account where the amount you contribute to the IRA is not tax-deductible, but your contributions grow tax-free. Contributions and balances from converted Traditional IRAs must be left in the plan for at least 5 years, or they may be subject to a 10% withdrawal penalty. Other advantages of a Roth IRA include – No required minimum distributions, no age limit for contributions, and potentially you can pass the IRS on to your beneficiaries and it will be tax-free to them too.

The contributions are not deductible on your tax return as you can only contribute to a Roth if your modified adjusted gross income (MAGI) is less than the following amounts based on your filing status (Phase-out range): 

Traditional IRA 

If you cannot contribute to a Roth IRA or wish to deduct your contribution, you may consider a Traditional IRA. A traditional IRA is usually tax deductible, but then you pay the tax on the money when you withdraw it at retirement. Some people will do a “back door Roth” where they contribute to a Traditional IRS, do not tax the deduction, and then convert the balance to a Roth IRA – this allows them to get around the MAGI limits.

When you retire, you will pay regular income tax rates on the money you withdraw from your Traditional IRA. You will also have required minimum distributions, which under current law start at age 73.

If you withdraw your contributions before you reach 59.5 years old, you may be subject to a 10% early withdrawal penalty.

9. Tax Treaties 

While not precisely an expat tax deduction, a tax treaty can help Americans avoid double taxation while living abroad. When living in a country with a tax treaty in place, that treaty will define whether the US or your host country has jurisdiction to tax a given source of income. (Typically, you will pay taxes to whichever country you reside in for most of the tax year.) 

Keep in mind that most tax treaty benefits cannot be claimed by US citizens abroad due to the Saver’s clause. Only treaty articles specifically excluded from the Saver’s clause can be claimed by US expats. 

10. Totalization Agreements 

Totalization agreements are treaty-like agreements between the US and another country’s social security system. These agreements cover the amount of ‘credits’ accrued for old age or social security plans based on work and salary. 

A totalization agreement will also cover US taxpayers’ self-employment taxes, which are the social security and Medicare payments for the self-employed income. This is done by informing the IRS that the self-employment taxes are being paid to the resident country instead of the US. Self-employed taxes can amount to 15% or more of the net income of a sole proprietor. 

It’s important to research if your resident country has a Totalization Agreement with the US before you go into business for yourself. 

To learn if your host country has a tax treaty with the US, check out this list from the Social Security Administration. 

Get Reliable Help with Your Expat Tax Deductions 

While this is not a comprehensive list of expat tax deductions and credits, we hope it gives you a better understanding of how you can reduce your US expat taxes. If you have any additional questions, we’d be happy to answer them! 

If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.