Reduce Your Tax Liabilities
Updated on November 22, 2024
Aya Takriti, an IRS Enrolled Agent with 11 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in the Middle East. *Schedule a consultation with Aya today.
*30-minutes US$247.
Table of Contents
How can I reduce my tax liabilities?
There are strategies you can apply to lower your taxes, such as claiming deductions and tax credits or earning tax-free income.
While paying taxes is a civic obligation, it isn’t usually a pleasurable experience. But that stack of paperwork could lead to significant tax savings. There are proven and legal ways to minimize your tax liability, like exclusions, credits, and deductions.
How does a tax exclusion work?
A tax exclusion removes a specific type of income from your taxable income to reduce the income subject to tax. Americans abroad commonly claim the Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion (FHE).
Am I eligible to claim the Foreign Earned Income Exclusion (FEIE)?
If you are a US expat with foreign-earned income from wages or self-employment income, you can generally claim the FEIE. This exclusion allows you to subtract income earned and taxed in a foreign country from your US taxable income.
For 2025, you can exclude up to US$130,000 from your US taxable income.
What is the Foreign Housing Exclusion (FHE)?
The Foreign Housing Exclusion (FHE) is another tax exclusion that helps American expats reduce their total US taxable income. This exclusion reduces housing expenses like rent, utilities, or repairs incurred in a foreign country.
The amount you can exclude for the FHE is determined by computing your base housing amount from your total foreign housing expenses for the year. This base housing amount is linked to your maximum FEIE.
So, the FHE works alongside FEIE to reduce the overall tax liability of US citizens living abroad.
Can I claim the FHE as self-employed in another country?
Yes, but for self-employed individuals, the housing expenses are treated as a deduction rather than an exclusion, lowering taxable income but not reducing your gross income.
Which tax credits are currently available to taxpayers?
Tax credits are used to lower your taxes dollar for dollar. IRS tax credits include:
- The child tax credit (CTC) and additional child tax credit (ACTC)
- Earned income tax credit (EITC)
- First-time homebuyer credit
- Education credit
- Child and dependent care credit
- Lifetime learning credit
- Adoption credit
- Retirement savings contributions credit
It is important to note that you’re still eligible for tax credits even if you don’t itemize on your tax return.
Can I claim Foreign Tax Credit (FTC)?
Again, If you are a US citizen or resident alien with foreign income, you can claim the credit. The FTC is a non-refundable credit for income taxes paid to a foreign government.
The amount you can claim for the FTC should not exceed your total US tax liability multiplied by a fraction. The fraction’s numerator is your taxable income from outside the US, and the denominator is your total taxable income from US and foreign sources.
Can US expats claim the Child Tax Credit?
Yes, US citizens and Green Card holders living outside the US can claim the Additional Child Tax Credit (ACTC). This refundable credit was created to relieve parents and guardians of dependent children financially.
For tax year 2024, the maximum refundable credit is US$1,700 per eligible child or dependent. However, claiming the FEIE alongside it may reduce the CTC or ACTC amount.
Can tax treaties reduce my US tax liabilities?
Yes, tax treaties between the US and other countries can help reduce tax liabilities by eliminating double taxation on certain types of income, such as pensions, social security benefits, interest, dividends, and capital gains.
Tax treaties can also reduce liability through reduced tax rates or exemptions for specific income categories. Some treaties lower or eliminate withholding taxes on dividends or interest earned in the treaty country, which can reduce the overall tax burden for US citizens earning investment income abroad.
Stay on track with the best strategies to reduce your tax liabilities based on your unique tax situation.
How can I earn tax-free income?
Some gains are not subject to income tax, and certain tax policies can help you avoid paying capital gains or income tax, lowering your tax liability.
You can also:
- Invest in tax-free bonds
- Put money towards your child’s education with a 529 Plan if you’re eligible
- Open a health savings account
- Take advantage of employer benefits such as insurance plans, dependent care, and educational assistance.
How does contributing to a retirement account work?
Contributing to retirement accounts can reduce your taxable income and lower your taxes. There are employee-sponsored plans like a traditional 401(k) or 403(b) plan. Still, if an employer-sponsored plan isn’t available to you, you should consider a traditional individual retirement account (IRA) instead, which offers similar benefits.
Contributing to a traditional 401(k) plan through your paychecks offers a dollar-for-dollar reduction in your taxable income. The Roth 401(k) or 403(b) don’t provide upfront tax benefits but allow for tax-free withdrawals later.
Contributions to a traditional IRA will be made with pre-tax dollars. This means that you will have less taxable income and lower tax liability.
Can I get a credit for higher education?
Yes, the US government provides tax credits to offset the cost of higher education (the American Opportunity Tax Credit). This credit can be claimed for the first four years of college, and the maximum credit per student per year is US$2,500.
Another credit is the lifetime learning credit, an excellent option for adults continuing their education or training. This credit can be used for college and educational expenses that improve job skills, and the maximum credit is US$2,000 per return.
Can donating to charity lower my tax bill?
Yes, The IRS allows taxpayers to make itemized deductions for any donations made to a qualified charitable organization on their tax returns
Taxpayers who itemize can deduct donations of money, stock, or noncash contributions (such as used clothing and household items), and sometimes out-of-pocket expenses such as transportation costs. Any donation exceeding US$250 in value requires a receipt to be a valid deduction.
Can I profit from investment losses?
Yes, you can reduce your tax liability for the given year when you sell off investments that have declined since you purchased them.
This strategy is often referred to as ‘tax-loss harvesting.’ The IRS allows these investment losses to be written off against investment gains up to a certain limit each year. The limit is US$3,000 for single filers or married filing jointly and US$1,500 if you’re married filing separately, and you can carry additional losses forward.
Are there state and local tax breaks?
Yes, and you may also be able to reduce your state and local tax burden.
Federal tax reform laws eliminated miscellaneous deductions; however, many states still allow them. In New Jersey, taxpayers can deduct the cost of medical expenses that exceed 2% of their adjusted gross income, whereas, on federal tax forms, medical expenses need to be more than 7.5% of income to be deductible.
The tax savings here aren’t just for income taxes. For example, in New York City, there is a parking tax for some rented spaces. Residents can request an exemption and waive a portion of the fee.
Check with your local and state taxing authorities to determine available deductions.
