Can I get a tax refund as an American expat living abroad?
Santa Claus, Yeti, tax refund for American expats: One of them actually exists.
Most expats (at least the ones reading our site) know that they have to file a US tax return. They see it as
an unfair obligation bestowed upon them, with few discernable benefits gained. However – what many do not
realize is that they are often eligible for a refund! This article will explain what kind of
credits are available to Americans living abroad and how you can actually get a
refund from the US government.
This is probably one of the most pleasant parts of our job – informing a client that he or she is actually
due a tax refund from the government, especially if this possibility was never even considered! Often times
we find a refund opportunity while performing the
Free tax return review
for clients who have self-prepared or used less competent accountants in the past.
Two types of tax credits:
-
Non-refundable credits: A nonrefundable credit is a dollar-for-dollar reduction of the
tax liability that can only reduce the tax liability to zero. You will not see these credits as a refund
amount on your tax return. However, they are extremely valuable as an offset tool reducing an existing tax
liability.
-
Refundable credits: A refundable tax credit is a tax credit that can reduce your tax
liability beyond zero. These credits are a pleasant (sometimes frightening) surprise for expats who did
not pay any tax in the U.S. and discovered a 4-digit figure in the “Amount you overpaid” box at the
bottom of form 1040. We believe this is fair: like other Americans, expats are required to file U.S. tax
returns - hence, like other Americans, expats should qualify for tax credits.
Examples of the most common non-refundable credits:
-
Child and dependent care credit: This credit is based on a percentage of the amount
actually paid for qualified care expenses. The caveat: you must have earned income to
receive this credit. If your salary is fully excluded via the Foreign earned income
exclusion and you have tax due on dividends or interest, you will not be able to reduce tax
through this credit.
-
Education credits: hope and lifetime learning credits. The good news: you can receive
education credits even if you do not have earned income and reduce tax on other income. However, you will
not get a refund if no tax is due.
-
Child tax credit: credit for taxpayers with a qualifying child. The credit is limited
to $1,000 per qualifying child and can only offset tax due.
Examples of the most common refundable credits:
-
Additional child tax credit – has the same requirements as the regular child tax
credit. The caveat: If your salary is fully excluded through the foreign earned income
exclusion, you will not receive the refund. Expert tax preparers (read: us) know how to adjust the amount
of excluded income in order to keep the taxpayer below the taxable level while making him qualified for
the additional child tax credit.
-
Earned income credit – refundable credit for low income families. The
caveat: you must have lived in the U.S. for at least 6 months of the filing year to qualify for
the credit.
- Adoption credit - refundable for adoptions finalized in 2010 or 2011
- Excess social security credit - If you work for more than one employer during the year, each U.S.
employer is required to withhold social security taxes up to the maximum for that year. If you have
withheld from your pay more than the annual maximum, you qualify for a refund.
-
American opportunity credit – Good news: a cash refund for qualified higher education
expenses can now be paid directly to the students earning below the taxable level. Caveat
#1: student cannot be listed as a dependent on parents’ tax return. Caveat #2:
graduate students do not qualify for this credit. The Tax relief and Job Creation Act of 2010 extends the
AOTC for two additional years until Dec. 31, 2012
The list of 8 types of credits listed above is not exhaustive. However – the larger point we’d like to make
is twofold:
- It is possible to get a refund from the government as a US expat living abroad.
-
US taxes are complicated – and much more so if the taxpayer is an expatriate. This is
why we encourage expats to work with a qualified professional. Not only will you save yourself from making
a costly mistake (and anguish of uncertainty), but also ensure that you’re minimizing your tax liability -
and possibly even getting a refund!
How many refunds are lost?
If you are actually due a tax refund, it’s important that the IRS has your correct details. Last year the
agency released a statement stating that they have over $150 million in undelivered refunds.
Accounting Today recently explained how the IRS found themselves in this situation in the article
"IRS Stuck with $153.3 Million in Undelivered Returns."
This is already becoming an annual occurrence:
“In what has turned into an annual ritual for the service, the IRS said it has a fortune
waiting in its coffers that could not be delivered to taxpayers because of mailing address errors. Taxpayers
can still claim their refunds, though, and can probably use a little help from their accountants. The
average size of an undelivered refund check this year is $1,547.”
How to avoid losing your US expat tax refund
IRS is encouraging taxpayers to take advantage of e-filing and electronic deposit options that are available
to taxpayers around the globe. By avoiding the postal system, you reduce the likelihood that your refund
will be lost.
“…taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit
when they file their tax returns, either on paper or electronically. Last year, more than 78.4 million
taxpayers chose to receive their refund through direct deposit. Taxpayers can receive refunds directly
through their bank account, split a tax refund into two or three financial accounts, or more recently
buy a savings bond with the money.
