Choosing the Correct Filing Status for Expats
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When it comes to filing a US tax return from abroad, many people feel that there’s a certain way you have to do it. In reality, there are a number of ways to file a tax return based on your personal circumstances and where you live. You just need to find out which one works best for you, and it’s usually based on earnings, family circumstances and amount you can gain from deductions.
So, what are your options as an ex-pat or American living abroad?
Filing As Single
Filing by yourself is something that you need to do if you’re living by yourself and are only responsible for your own income and finances. This means you have no dependents to add to your tax return or a spouse to consider.
Married Filing Separately
This is the filing status generally used by people that are married to a non-American. You may also need to file separately due to the tax liabilities of your spouse which may mean that you end up paying a little extra if you were to file jointly. For example, previous missed filing dates or student loans. For couples that have separated but not yet officially divorced, this can also be a common filing status.
Married Filing Jointly
If you’re married to a US person or a Green Card holder, and you’re happy to file as part of a couple and to benefit from better tax breaks, then you should file jointly. This is often a great option with one high-income earner and one low-income earner to balance out the tax and come into a lower tax bracket as a couple.
Head of Household
Filing as head of a household is likely your best option if you have dependents (children) and you’re single or married to a non-US person.
Your children don’t need to be “Qualifying Dependents” for you to use Head of Household, this is often misunderstood. They don’t have to be US citizens or hold Social Security Numbers.
They certainly do need to be classified as a “Qualifying Dependent” to claim the Child Tax Credit Refund or Stimulus Payments.
How to File If You Are Married to a US Citizen (or Green Card holder)
If you’re married to an American or Green Card holder, it’s almost always more beneficial to go for the married filing jointly option on your tax return. This helps you retain more of your income for a number of reasons:
- It’s simply the most efficient way to file. Filing jointly on your US tax return means that you only have to fill out one tax return to cover both people, saving you time and usually tax preparation costs.
- If you’re working with a professional tax preparation firm such as Expat Tax Online, it doesn’t cost any extra to file as a couple, compared to file on your own. Important to note, many firms to charge an additional fee to file jointly, so check carefully.
- You’ll be entitled to better tax breaks, especially if one partner earns more than the other. This is because the whole of your income is taken into consideration and split out evenly between the couple. This might mean that the higher earner’s salary can be spread across two people, putting each person in a lower tax bracket.
I want to know more about US Taxes abroad
Can I file jointly if my spouse is not a US person or Green Card holder?
Technically yes, but you’d want to have a very good reason to.
They’ll need an ITIN too (it’s like an SSN for non US person).
When would it be a good idea to add them to my tax return?
If you’re married to a non-US citizen and they work but you don’t, or you’re on a lower income because you’re a homemaker or are currently out of work, it could be more beneficial for you to file jointly if you have US children. This is because, alone, with your low income, you wouldn’t be eligible for a Child Tax Credit Refund. However, adding them onto the tax return, if they have a higher income, that could push you over the threshold to claim the refund.
On the other hand, if you are married to a non-US citizen and don’t currently have children, then filing separately is likely the better option for you. We’d only bring a non-US person onto a US tax return if there was a very good reason to do so.
Other reasons to file separately if you’re married could be:
We’re separating.
In this case, you can consider filing separately, it’s a common approach taken by many that are separated or waiting for their divorce to complete. This is because a joint tax return means that you are jointly liable for tax repayments. If you’re worried that your spouse has a lot of tax to pay, then you may not want to be part of that.
Equally, if you are due a tax refund because of overpayments or other breaks, then you don’t want your spouse to be entitled to half of your money that’s refunded.
If you’re breaking up with a spouse (partner) that’s not a US-person and you’ve been filing as Married Filing Separately, then once your full divorce comes through, you can switch to the Single filing status which is a much better filing status overall.
Tax Liability
If your spouse owes the IRS due to unpaid taxes, interest charges or late filing penalties then filing separately might be a safer option for you. This is because filing jointly will mean that you’re suddenly liable for half of their debt.
Student Loans
If you and your partner both have a student loan, but their income is much higher, then filing separately is worth considering. This is because, even though your income is lower than the payback threshold for your student loan, your spouse’s may not be. If you file jointly, your spouse’s income will be spread across the two of you evenly. Meaning you’ll have to start paying back your loan even if you wouldn’t meet the criteria if you filed alone.
Why Head of Household Works So Well For Expats
Filing your US tax return as the head of a household could be more beneficial for you then filing separately or jointly depending on your situation. This is mainly due to certain tax breaks that you could qualify for as the head of your household and the Child Tax Credit Refund that may be available to you if your have US children under 17 years old.
To qualify to file as the head of a household, you would need to have dependents. These can be children or adult dependents if you are legally caring for them. To file as the head of the household, you don’t need to have a spouse and your dependents don’t need to be US citizens with social security numbers or hold a Green Card.
A dependent needs to simply be living in the home for 50% of the year and you need to be paying at least 50% towards their cost of living. This could either be because;
- they have income coming from elsewhere if they are an adult dependant who qualifies for other payments or a child under 17 who has part time employment or
- because you have an ex-spouse who also contributes to their financial wellbeing.
Remember, to claim the Child Tax Credit Refund your children must be US citizens, be under 17 years old and hold their own Social Security Number.
Married Filing Separately Vs. Head of Household
If you qualify to file for the head of a household, then this is always better for you than being married and filing separately. This is because the head of household gives you better standard deductions, especially if your spouse is not a US citizen.
The tax bracket before tax is paid for married filing separately is currently $12,550. But if you qualify for head of household, then you can reach $18,500 before paying tax, giving you an extra $5,000 income free from tax.
How to Claim a Child Tax Credit Refund
Before we get started on this, please not if you claim the Foreign Earned Income Exclusion as an American living abroad, you will automatically be disqualified from the Child Tax Credit Refund.
In reality, you need to live in a foreign country where you’re paying local taxes on your earned income. You can then file your US taxes using the Foreign Tax Credit method instead of the Foreign Earned Income Exclusion and you could then be eligible for the Child Tax Credit Refund.
How to qualify…
Your child (dependent) needs to be under the age of 17 on December 31 of the tax year you’re filing for.
They need to have their own social security number, issued before the filing deadline of the tax year you’re claiming for.
You’d also need to have worldwide income that’s under US$200,000 (US$400,000 if you’re filing jointly).
You also need to have a minimum income too and this catches many people out.
The minimum income to qualify is US$2,500.
The refund is calculated at 15% of your adjusted gross income above US$2,500.
The maximum amount is US$1,400 per child. It’s not $2,000 as some say. Only $1,400 is actually refundable when you’re living abroad.
Let’s look at an example: You have one qualifying child and you’re filing as Head of Household.
Your adjusted gross income (consider total earned income for the example) converts to US$20,000.
Here’s the calculation;
Example #1
Income = $20,000
Deduct $2,500
Total = $17,500
15% of $17,500 = $2,625
The maximum allowable = $1,400
Your refund = $1,400
Example two; let’s compare that to a person with $10,000 earned income.
Income = $10,000
Deduct $2,500
Total = $7,500
15% of $7,500 = $1,125
The maximum allowable = $1,400
Your refund = $1,125
Example three; what if you have two children with $10,000 earned income.
Income = $10,000
Deduct $2,500
Total = $7,500
15% of $7,500 = $1,125
The maximum allowable = $2,800
Your refund = $1,125
Example four; what if you have two children with $20,000 earned income.
Income = $20,000
Deduct $2,500
Total = $17,500
15% of $17,500 = $2,625
The maximum allowable = $2,800
Your refund = $2,625
It’s confusing again because the child tax credit that’s available for families living in the United States is much different to Americans living abroad. Ex-pat families get about half the amount, or less.
How much do I have to earn to get the full Child Tax Credit Refund?
This basic table will help you.
Summary
If you’re concerned about how to file, consider your personal situation. Essentially, there’s no right or wrong way to file in the eyes of the law, as long as you qualify for your filing status and file on time. Remember non-filing or late filing could incur penalties that you really don’t want to pay, so make sure you apply for an extension if you can’t meet the filing deadline.
It’s important though to understand which way works out best for you financially. Professional tax professional can help you to assess your home situation, income and previous tax filings to determine which way is most beneficial for you. It could save you a ton of money and time in the long run and it will give you peace of mind, knowing that you’ve filed everything correctly and on time.
Get in touch with Expat US Tax to help you work out your most advantageous filing status.