One of the most important things to remember when living in the US is filing your annual tax return with the Internal Revenue Service (IRS). As an expatriate, there are certain rules and regulations that you will need to follow which are a little outside the norm.
Throughout 2021, some of the standard regulations for expat tax returns have been amended and it’s sometimes a little tough to keep up.
So, here are the top 10 things that you need to know before you file your 2021 tax return.
Top 10 Tax Return Changes for 2021
One of the main changes for expats in general is the exclusions which are affected each year and determined by the level of inflation. This year the foreign earned income tax cost has risen slightly to $108,700 for the year, meaning the threshold for expats paying tax is higher, so you can earn more and pay less. For this reason, expats are actually benefiting from the increase in inflation this year.
This is on top of the housing exclusions which can also be deducted from an annual tax bill. The housing deduction exclusion stands pretty much the same as last year so if you filed in 2020, you shouldn’t see much change here.
2. Reduction Service
The standard reduction service process hasn’t changed from year to year. However, the amount is very slightly higher in 2021 than in previous years.
In this case, it is beneficial to file jointly with a partner or as the head of a household.
In previous years, the tax has been $24,800 dollars for joint filing but has increased by $300 this year to $25,100.
For single taxpayers though, the amount has also risen to $12,550, so $150 per person at the same increase rate as joint filers. For ‘head of household’ it stands at just $18,800, so it’s beneficial for larger households as the lower rate would be applied for filing as a head of household.
3. Rebate Credits
Recovery rebate credits are normally automatically refunded to you and if you qualified in 2020, there’s a good chance that you will qualify again in 2021. The total amount is $1,400 per person and these are usually refunded directly to your registered bank account with a reference of “US Government.”
If you didn’t qualify in 2020, this is your opportunity to put your name forward to claim it as a credit on your tax return.
You may be entitled to a stimulus payment if you’re filing jointly for a total of $100,000 or as a single entity for a total of $75,000. This is when a $1,400 check is paid directly to you from the U.S government to supplement your income rather than having to claim back via rebate. If you haven’t received this for your 2021 tax year, you can apply via the IRS to reduce your tax return.
If you don’t file for a tax return in 2021, you will not be entitled to the stimulus payment.
If you haven’t received the stimulus payment previously, either because you were not in the U.S. or because you didn’t file a tax return in the previous year and you don’t have a U.S. bank account, you may receive a check for the payment which you are unable to cash before your tax is due. In this case, you may be able to change your stimulus payment directly into tax credit. Meaning that it would be deducted from your overall tax bill.
How Do I Turn My Stimulus Check into Credit?
During your first year within the U.S. you may struggle to set up a U.S. bank account, which may mean that you are unable to cash your stimulus check directly and turn it into credit. Usually, to do this, you would need to have filed a tax return in the same country in the previous year.
If you didn’t file a tax return in the U.S. in 2020, then an option may be to set up an account with a company like Wise.com. This will allow you a U.S. bank account number or an IBN (International bank account number) to pay in your checks.
4. Charitable Contributions
Normally, you could claim up to $25,100 in charitable contributions back if you have paid more than this is annually. This means that you will never benefit from charitable contributions but may receive some funds back based on the amount you pay.
However, this year is slightly different. If you pay jointly, you are entitled to claim back $300 per person, so up to $600 on top of the $25,100.
To claim back on charitable contributions, the charities you choose must be U.S. charities, have begun in the U.S. or must have been flagged as an official American charity by the IRS.
If you’re unsure if the charity you choose is an official U.S. charity to claim your contributions, there’s a list that you can check out on the IRS website.
What if I Made My Charitable Contributions in Cash?
You can still claim on charitable contributions for cash and non-cash payments. However, if you are contributing more than $500 in a single transaction, you must have a receipt to prove your spend.
I want to know more about US Taxes abroad
5. Child Tax Credit Refund
In 2021 the child tax credit total has risen from $2,000 per child to $2,600. This is great news for the U.S. if you happen to have 2 children or more of ages 17 and under. If this is the case you could automatically qualify for a refund of $70-$100 off your tax in advance per child, even if you don’t owe any money. This would always be based on if you’ve lived in the U.S. for at least the previous year.
The great thing about a child tax credit refund is that the income threshold isn’t important. You can earn anything up to $200,000 as an individual or $400,000 if filing jointly and still receive the refund if you meet the other criteria.
However, if you have recently moved to the U.S. you won’t benefit at all for this year’s increases. Americans living outside the U.S. will only be entitled to the $2,000 standard funding from previous years and the refundable portion of this is still only $1,400.
If you moved out of the U.S. midway through the year, you would have the relevant amount deducted from your refund. As the refund is typically paid back to you in advance this may mean that you owe some money rather than being given the full refund value.
6. Student Loan Relief
2021 has some great news for students in the U.S. If you had previously applied for student loan relief after studies, this would be taxed at the normal rate. However, this year, student loan relief is no longer going to be taxed and any help that has been provided to pay student debt won’t need to be declared on a tax return until 2025.
7. Unemployment Benefits
In 2020, unemployment benefits claimed were non-taxable. However, coming in 2021 any unemployment benefits claimed this year and going forward will be eligible for tax. They will need to appear on a tax return.
8. Retirement Contributions
When it comes to retirement, you will always need to think about what you plan to do before the end of the tax year in the year prior to your retirement.
If you’re employed within the U.S., the process is fairly simple as you’ll just need to maximize your contributions through your 401K.
However, expats working for a foreign company are unlikely to have a 401K scheme. If this is the case, you may need to look at an Individual Retirement Account (IRA) to allow you to stash away a portion of the money that you can comfortably live without for a while.
People who are under 50 years old are able to add up to $6,000 to an IRA and people over 50 can add up to $10,000 before April 15, 2022. Anything in the IRA by the end of April will be non-taxable, but unusable until the following year.
9. Long-term Capital Gains Rates
The process for long-term capital gains rates hasn’t changed at all, but the thresholds for paying tax on these are slightly different depending on how much you invested.
- Up to $40,000 – 0% tax
- Up to $400,000 – 15% tax
- Anything above – 20% tax
This is great as you can easily invest a lower amount, still earn money back from your investment and pay no tax.
This system is based on long-term capital gains only. If you invested and sold your assets within a 12-month period, this would be classed as short-term. You would need to have held your full investment for a period of over one year to receive these tax rates.
10. Esteemed Gifts
In the U.S. you are able to gift someone up to $15,000 per year or up to $30,000 if you file jointly as a cash or non-cash transfer which would remain non-taxable. This is a culmination of all gifts that you have given in that tax year, even if they are to multiple people, so it’s a good idea to consolidate this to understand how close to this threshold you are. Throughout your lifetime, you are able to gift no more than $11.7 million to any individual, whether in America or overseas.
If you have gifted more than $15,000 in a single year, you will need to declare this on a gift tax return which you’ll need to file at the same time as your standard tax return.
If you received any gifts from an unknown U.S. person who is not a U.S. citizen, someone from overseas or a green card holder, the limits are a little different and there are no tax payment obligations up to $100,000.
If you do receive in excess of $100,000 combined gifts throughout the tax year, you must declare this using an Information Return of Foreign Trust form (3520 form).
When will the IRS Start Accepting Tax Returns for 2021?
Typically, the IRS will open up for accepting e-filed tax returns toward the end of January, 2022.
Once your tax return is in, it can take 2-4 weeks to receive your refund back as long as you file electronically. If you file right away, you can expect your refund by the end of February 2022.
However, paper-based tax returns could take anything up to 6 months for the full refund to come back to you.
To be fully prepared you should start gathering your evidence and information in December 2021 as not much changes in December from a tax perspective. Once you have everything together, you’ll be ready to file as soon as the IRS opens up to accept your return, meaning that you’ll likely receive your refund faster.
At Expat US Tax, we offer an easy-to-follow tax questionnaire from January 1 to help expats fill in their tax return and jump to the front of the queue as soon as the IRS open their doors to process refunds, so you’ll get your refund at the earliest possible stage.