us expat tax guide – united arab emirates
FTC vs. FEIE, FBAR, and
End-of-service benefits
This chapter includes the tax deductions you can claim to reduce your tax liability, should you file an FBAR, and the end-of-service benefit in the UAE.
The Difference Between Foreign Tax Credit vs. Foreign Earned Income Exclusion
There are usually two deductions from which a United States (US) citizen living outside the country can benefit. These are the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credits (FTC). The FEIE inflates every tax year. Hence, it may differ each time you file.
For the 2023 tax year, the maximum income exclusion a US person can get is approximately $120,000. This is on the basis that the person is living outside the United Arab Emirates (UAE) for 330 days in a 12-month period, that person has established residency in a foreign country, and they have foreign-earned income.
The $120,000 exclusion means that only US citizens earning more than this amount in foreign-earned income will be taxed. So, any other person earning less will be able to benefit from the exclusion. If the foreign earned income of the US person exceeds the exclusion amount, there is an additional deduction, which we refer to as a housing deduction.
The housing deduction applies to what you pay towards your rent and utilities. So, a portion of what you pay towards your housing expenses could be used as a deduction and added to the foreign earned income exclusion to maximize your benefit. However, this can get a bit tricky at times because the housing deduction depends on where in the UAE you are living. So, the threshold for Dubai is different from the one for Abu Dhabi or Elian.
The foreign earned income exclusion and housing expenses are common expat tax filing requirements that we regularly work with. The FTC is applicable when a US person establishes residency in a foreign country. For example, the income of a US citizen who is living in Germany will be taxed because Germany will tax the person’s worldwide income. This means the US person would have to pay taxes on his German income.
To avoid double taxation, the US citizen or green card holder could claim the income tax he pays in Germany on his US tax return. This will offset the person’s US tax liability. We refer to this phenomenon as a “foreign tax credit.” It basically helps US citizens who earn foreign income and are taxed by their countries of residence to avoid double taxation.
So, which one do you select? Do you go with a foreign tax credit or a foreign-earned income exclusion? We get asked this question a lot, and there is no simple “yes” or “no” answer. It depends on your tax situation, among many other factors.
If you are living in the UAE, where you don’t have to pay income tax, then the Foreign Earned Income Exclusion is a much better option for you. However, if you’re living in another country where you do pay income tax, the benefit of the foreign tax credit is that you can carry forward any unused foreign tax credit for later years. You can carry it forward for the next 10 years, which could be a very good option for many individuals.
Understanding the Foreign Bank Account Report
For US citizens or residents, a “foreign bank account” refers to any bank account held outside of the United States. Depending on the balance in that account or multiple other foreign bank accounts, there are some filing requirements to meet. One such requirement is the foreign bank account report (FBAR).
If a US citizen or green card holder (a US person) has bank accounts in a foreign country where the highest balance of one or more accounts exceeds a total of $10,000 in a calendar year, then that person is required to file the FBAR form.
Many people often believe that the bank will file the FBAR form on their behalf. However, FBAR filing is a personal responsibility.
Banks may ask their customers to file a “Know Your Client” (KYC) form indicating whether they are US citizens or green card holders. They might also ask for the US person’s social security number. However, this does not mean that the bank is meeting the IRS filing requirements on your behalf. The bank is asking for all that information to protect itself. The bank is enforcing this filing requirement because it must as a bank.
As a US person, you would then have to meet the Internal Revenue Service (IRS) filing requirements, such as the FBAR, separately. The FBAR forms are usually due by April 15, and there is an automatic extension to file them until October 15.
It is important to note that the FBAR is only a reporting requirement. This means there are no taxes to pay on the highest balance. The only tax you might end up paying is if your savings account or fixed deposit is generating some income. So, the income that is being generated by this account would be expected to be reported on your US tax return and would be taxed accordingly.
We often see individuals who have joint accounts with their spouses or other family members. These accounts would also have to be reported on the FBAR, as long as the US person has the authority or is a joint owner of a bank account.
At times, the company you’re working for may want to give you authority over their financial accounts. This would mean that you have signature authority over the company’s bank accounts, which would then trigger the FBAR filing requirement as well. This filing requirement applies to any other bank account you have authority over.
If you have the filing requirement to report the FBAR, then that account should be added to your FBAR on the basis that you have signature authority over it and control over it. Even though the account is not in your name, it would still have to be reported as long as you have signature authority or are a joint owner of the account.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
Tax Filing for Your End-of-Service Income
Unlike the United States and other countries, the United Arab Emirates (UAE) does not have any social security or pension income. However, there is something similar to social security, which is referred to as “end of service income.”
Unlike the United States and other countries, the United Arab Emirates (UAE) does not have any social security or pension income. However, there is something similar to social security, which is referred to as “end of service income.”
End of service is the amount you get paid when your employment is terminated. When you leave your employer, they pay you that end-of-service income. As a US person, the end-of-service income you receive cannot be fully excluded from the tax year that you are filing for or the year that you receive the money. This income would be reported and taxed on your United States (US) tax return.
You cannot benefit from the current tax year’s exclusion for that amount because part of the end-of-service is based on services you performed in earlier years. Thus, a portion of that income does not really fall under the current year that you’re earning or the current year that you’re filing a tax return.
For end-of-service income, there is a special calculation that we do for your potential tax return. We look at the total amount you have received. Then, we look at the start date of your employment. Finally, we look at the date that is your last day with your employer.
We then do a calculation to determine how much of that amount is allocated for each year of your employment. And based on the amount that you receive from your employer, we can determine how much of it is allocated to the current tax year that you are filing and how much could be excluded. So, the tax filing process does get a bit tricky.
Normally, we recommend that clients give us a call before they receive their end-of-service. We are then able to make sure that, from a tax perspective, they’re maximizing their benefit. This will ensure that they do their filing for that tax year in an efficient way that will help them later on.
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AM I ELIGIBLE FOR FOREIGN EARNED INCOME EXCLUSION? Learn from Tanveer Mannan, a highly experienced IRS Enrolled Agent based in Dubai. Having worked at EY and PWC before joining EXPAT US TAX, Tanveer has 15 years’ experience of helping Americans get the correct advice when they come to work in UAE. Getting the correct tax […]