Updated: Jan 26, 2019
Gathering documents is just as important as filing your U.S. expat tax return. It is advantages that you keep all the documents and information, as the IRS may audit your return and you will need to prove your numbers. To make your life easier, collect and store your documents and related forms in the order that is shown below:
Basic information includes the tax questionnaire, prior year tax returns, and a travel journal.
A tax questionnaire is a form that your tax preparer will provide you with to complete. It asks you basic identifying information, as well as details about living and working conditions. You will need to fill out this form carefully as your tax preparer will assess your situation based on this information, and choose the best tax treatment to maximize your wealth while also minimizing your tax burden.
The prior year tax return will help you to file your return for this year, as it already provides some of the important available information. For example, if you want to use the Foreign Tax Credit, then you need to know that it’s crucial to correctly carry it forward. It’s also important to check your returns from previous years for any mistakes that could be fixed now so that you will escape possible negative consequences or penalties etc.
Keep a travel journal of your voyages as the IRS will ask for the exact dates of your travels. If you travel back to the U.S. for work, the dates will play an important role in prorating your income between U.S. and non-U.S. sourced. More importantly, a travel journal will help to determine whether you are eligible to use the Foreign Earned Income Exclusion or Foreign Housing Deduction under the Physical Presence Test or not. Keep track of the following things:
The country or countries you’ve traveled to besides your host country and the dates of your arrival and departure .
If you have visited the United States, then include the exact number of business days you spent there and the exact amount of gross income earned in the U.S.
Documents about income, including wages, self-employment, pensions, interest income, capital gains (security and real estate sales), real estate rental etc. These are some of the most important documents that you will need for your tax return:
Wages, salaries, and compensation. It’s necessary that you provide all W-2, P60, P45 and any other wage reporting forms. If you are a self-employed U.S. person abroad, then you will need to give your tax specialist precise and detailed records of your earnings before deductions and total expenses, which should be grouped.
Interest and dividend income. If you deposited money into a (foreign) bank or other financial institution, and they pay you interest, then this will be classified as interest income. Dividend income refers to any distribution of a company’s earnings to shareholders from stocks or mutual funds you own. Foreign banks usually do not have reporting forms that show the amount of income that is paid to you. That’s why it’s essential to keep your bank statements and reports of income from your foreign bank, even if this type of income is not taxable in your tax home country. American banks, on the other hand, provide you with year-end reporting forms and you will receive the 1099 forms.
Securities and stocks. If you own investments in any country, including the U.S., then you will need to report this on your tax return the capital gains and losses during the year. Your broker will send you a statement with accurate information regarding each of the transactions and you will need to make sure it has the purchase/sale price, transaction fee, and purchase/sale date. You may want to let your foreign broker know that this income is taxable in the U.S. Therefore, you will need all of this information.
Real estate. Any real estate bought and sold is pertinent to your tax return. Make sure that you have following information: date of sale/purchase, the purpose of property, total costs, and proceeds, any improvements made etc. If you own a rental property, then you will also need to provide your income and your expenses during the year, which will be reported separately on Schedule E.
Distributions, including pensions, annuities, profit sharing plans and IRA. The U.S. government will send you an SSA 1099 form if you receive Social Security payments from the US. If you have payments coming from a foreign social security and/or pension and do not have an end of year statement, you will have to keep track of the payments and report them as income.
Another type of income. You will need to report any partnership, trust, and business interest that you hold, as well as all other types of income that have not been mentioned. If you are a partner in a partnership or a shareholder of a corporation, your foreign partnership or corporation will provide you with an end of year statement that reports the income and expenses allocated to you. If you are a partner in the U.S. partnership or an S corporation, then you will receive a form Schedule K-1.
Deduction documents will help to reduce your taxable income.
These include interest and taxes paid, foreign housing expenses, dependents and a few other deductions.
Interest and taxes paid. Under the expat tax laws, mortgage interest, property taxes paid and income taxes paid are all deductible expenses. You must be able to prove that these payments were paid or accrued. Keep track of your bank account statements, transactions made directly to the governing agency etc. You can avoid double taxation on your income taxes if you live in a country that assesses income tax on your income.
Foreign housing expenses. You may be able to deduct the cost of your housing as a U.S. expat abroad. Ask your tax preparer whether you qualify.
Dependents. You must provide information, such as SSN or ITIN if it is applicable for all of your dependents. Your tax preparer will help you to claim the available deductions and credits if qualified.
Other deductions. Did you know that gifts to family members and charitable contributions to a qualified charity can lower your taxable income? Alimony and child support payments, as well as unreimbursed business expenses, are deductible expenses. They are subject to limitations, but can still significantly lessen your tax burden. Keep track of all your expenses and pass them on to your tax preparer, who will help you to lower your taxable income.
Foreign Bank Accounts are a big chunk of your tax return. If the aggregated value of your foreign bank accounts exceeds, or is equal to $10,000, on any given day during the year, then you must report this amount to the IRS. Contact us today to receive a copy of the Tax Guide for US Citizens Abroad or to speak to a US CPA experienced with filing tax return for expats.
Sources: 1040Abroad, IRS, H&R Block