If you are a US expat working in UAE, you may have a variety of tax concerns. From figuring out how much foreign income you should report, to understanding what tax breaks are available in your host country, it can be overwhelming!

Fortunately, the IRS has made it easy for expats to exclude up to $112,200 of earned income in 2022 and 2022.3 This is the Foreign Earned Income Exclusion or FEIE. It is a great way to reduce or eliminate your U.S. taxes on earnings abroad.

Expatriation

Expats, Americans who move to a foreign country to live and work, are subject to US taxation of their foreign income. They must file a US tax return each year reporting their income from abroad, and they must also file FinCEN Form 114 to report any assets in foreign bank accounts that exceed $10,000.

Many expats can take advantage of certain US tax benefits, exclusions, and deductions to reduce or eliminate their US tax bills. For instance, expats can exclude up to $112,000 of their 2022 foreign earnings from their US taxes using the Foreign Earned Income Exclusion (FEIE).

Another popular tax benefit for expatriates is the Foreign Tax Credit (FTC). Through this credit, expats can receive a dollar-for-dollar credit against their foreign income taxes.

However, expats must remember that FTC does not apply to passive income, such as interest, dividends, and rental income. In addition, the FTC cannot be used in conjunction with the FEIE to exclude foreign earned income.

Additionally, expats should be aware of a new provision that may affect their US taxation of their foreign earnings. Under this new law, a person who is a covered expatriate and who sells any property in excess of $600,000 within a single day before his or her expatriation will have their net gain taxed as if they had liquidated the asset.

Alternatively, the person may elect to use an alternative tax regime under IRC Section 877 that applies to expatriated individuals. The individual must meet certain objective criteria, including a high average income tax liability and a significant net worth on the date of expatriation.

In addition to the IRC 877 alternate tax system, certain U.S. residents and non-green card holders are also subject to an alternative tax system if they expatriate or lose their green card. This alternate system is intended to ensure that U.S. citizens and long-term residents are not overly dependent on foreign income, but it can also cause significant problems for expats who decide to reenter the U.S.

Fortunately, there are several tax benefits and treaties available to help prevent double-taxation for U.S. citizens and green card holders who are living and working abroad. These include the FEIE, the Housing Exclusion, the FTC, and tax treaties.

Foreign Earned Income Exclusion

Many expats and Americans living overseas will find that US taxation of foreign income is slightly different to other nations. The US taxes their citizens and green card holders on citizenship, rather than their home country, meaning that any income earned while abroad must be reported in the US (even if the individual does not live or work in the US).

Thankfully, there are several exclusions available for expats to reduce or eliminate their taxable foreign income. These include the foreign earned income exclusion and the foreign housing deduction, both of which can greatly reduce a taxpayer's US tax bill.

The foreign earned income exclusion is one of the primary tax breaks for expats, and it can be claimed by virtually all American-citizens living overseas who meet certain conditions. This includes anyone who meets the physical presence or bona fide residence test, has a tax home in a foreign country and earns a qualifying amount of income.

However, it is important to note that this benefit is limited and does not apply to unearned, or inactive, income. This includes things like pension payouts, interest and dividends. It is also not applicable if you are an employee of the U.S. government or a private company under contract with the U.S.

As with any tax-reporting issue, it is always best to consult with a professional who specializes in expat taxes. They will have the knowledge and experience to help you claim the benefits that you are entitled to, including the foreign earned income exclusion.

It is also a good idea to make sure that you are filing your US tax returns timely. If you have missed filing a tax return in the past, there is an IRS amnesty program called the Streamlined Procedure that allows you to catch up on your past filings, and eliminate any back taxes owed.

As with all aspects of US taxation, it is crucial to understand your specific situation and how it affects your income. It is also a good idea to speak with a qualified financial advisor about the taxation of foreign income for expats, as they will have the necessary knowledge and experience to help you file your taxes correctly.

Foreign Tax Credit

The Foreign Tax Credit is a valuable tool that can help expats minimize their US tax liability. It allows expats to claim tax credits against their US taxes based on foreign income taxes paid or accrued during the year.

Expats who qualify for the foreign tax credit must show that they have already paid or are owed foreign income taxes, or that they intend to pay these taxes. The IRS will also consider the amount of taxes that are refunded to you when determining the amount of credit you can claim.

Another way that the US can reduce its international taxation of foreign income is through the Foreign Earned Income Exclusion (FEIE). This tax deduction lets Americans living abroad exclude certain income from their federal tax return, and can be a great way to eliminate your US tax bill.

However, the FEIE only applies to earned income; it doesn't apply to unearned or investment-type income such as capital gains. In addition, the FEIE can't be combined with the Foreign Tax Credit to lower your US tax liability even further.

If you're planning to move abroad, talk with an experienced expat tax professional about how the FEIE can help you minimize your US tax liability. They will be able to advise you on the various forms of taxation that can be excluded from your US tax return, as well as help you calculate how much you can reduce your US tax bill by claiming the FEIE and/or the Foreign Tax Credit.

To claim the Foreign Tax Credit, expats must fill out Form 1116. This form asks expats to provide details about their foreign income taxes, the value of those taxes in both USD and foreign currency, as well as other tax deductions and expenses that they have claimed.

When calculating the amount of the foreign tax credit, it is important to use the correct method of recording your foreign taxes. The method you choose is important for ensuring that you can fully benefit from the credit, and to avoid potential problems down the line.

FATCA

Americans living abroad often find themselves struggling to comply with US taxation of their foreign income. This is particularly true of people with dual nationality. This is because FATCA, a US tax act, requires all banks worldwide to share information with the IRS on the accounts of American citizens and others who live abroad.

This can be a major headache for expats, especially those with large amounts of money in foreign bank accounts. It is important to understand how it works and what your options are if you have foreign assets.

FATCA is a law that was introduced in 2010 to combat non-compliance with US tax laws by American taxpayers using financial accounts outside the United States. It forces foreign financial institutions (FFIs) to report the identities of account holders to the IRS and may result in 30% withholding taxes for FIs that fail to comply with the law.

If you have an account with a foreign bank, you are required to report it to the IRS on Form 8938. This is especially true if you are married filing jointly and have combined foreign holdings worth more than $400,000 on the last day of the year or more than $600,000 at any time during the year.

There are many different ways that you can comply with FATCA, and there are also certain situations that you will want to avoid. If you are unsure how to proceed, it is best to consult with an international tax expert.

Another potential problem is the way that FATCA affects your relationships with foreign financial institutions. Some have reported that they will close or refuse to work with American clients as a result of the law, which can be quite upsetting for expats.

While this is not the case for every bank, it can be a frustrating situation for some. Fortunately, Americans Overseas has a network of specialised US tax consultants who can help you become compliant with the new law and minimise the impact on your finances.

Despite FATCA being an excellent measure to fight tax evasion, it can be frustrating for expats and their families. In particular, it can lead to a lack of access to banking services and the closure of your account if you are American. If this happens, it is important to know how to get a replacement bank account and the steps you can take to ensure that your money remains safe.