Ines Zemelman, EA 14-Jan-12
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 theForeign 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 requirement that 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 IRS has your correct details. Last year the agency released 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.