If you are a US expat, the requirement to file a US tax return can be painful but the tax liability doesn’t need to be. There are three main ways that expats can reduce their US tax liability.
First is the foreign earned income exclusion. For expats who are either a bona fide resident of a foreign country or are physically present in a foreign country for 330 days out of 365, the foreign earned income exclusion is available. The exclusion amount is $102,100 for 2017 and it increases slightly each year. You are able to exclude up to $102,100 of your foreign earned income. If you are working in a foreign country full time and qualify for the foreign earned income exclusion and made $75k then you can exclude all of it from your income and if you didn’t have other sources of income your US tax liability would be zero. If your earned income is more than the $102,100 limit then just a portion of your income would be excluded and the rest you could use with the foreign tax credit.
The second way to reduce your US tax liability is through the foreign tax credit. The calculations can be quite complicated when you have multiple types of income, but the general idea is simple. The idea is to eliminate double taxation so foreign sourced income that is taxed by a foreign government is used to calculate a credit based on how much tax you paid to the foreign government. For example, if you have $50k of interest income in a foreign country that is taxed at 20% you can claim a tax credit for that on your US tax return. It’s a tax credit so it offsets your tax liability dollar for dollar, often times if you are paying tax on all of your income in a foreign country and the tax rates are similar it could offset all of your US tax liability. It’s a nonrefundable credit though, so if your tax rate in the foreign country is higher than your US tax rate the extra is just carried forward to a future year, you don’t get a US tax refund based on the tax you paid to the foreign country.
The third way to reduce your US tax liability is through the tax treaty. The US has a tax treaty with many countries, but not all. The treaties have some similarities but each are unique. They address a range of issues because not every country has an income tax system that is just like the one in the US. If you are able to utilize one of the tax treaties to improve your tax position be sure to complete Form 8833 to disclose the use of the treaty position.