This is the final part in a series of blogs running over on our sister site,, which will hopefully shed some light on how expatriate US citizens file our taxes and why we need to be filing them.

In Part One, we looked at the rules US expatriates have to follow when filing their taxes. In Part Two, we then looked at the specific process of filing the most common forms which need to be completed. In the third and final installment of our series, we will take a look at what to do with the dollars you have left over after you have filed. This year, US citizens living abroad will need to file their taxes by June 15.

As we have discussed in the previous posts, the first USD 100,800 of foreign income qualifies for the Foreign Earned Income Exemption (FEIE), subject to you meeting the foreign resident test. This is a significant deduction and will generally mean that a US expatriate has little or no US Income Tax liability. Even if you do not qualify for the FEIE, then you most likely still have the ability to claim a tax credit under the tax treaty between the US and China. 

In the US, contributions to qualified retirement plans, such as IRAs and 401Ks, can be made pre-tax and therefore reduce your taxable income. For some US expatriates there may be no US Income Tax from which to deduct. Unfortunately, this means that many US expatriates I meet decide to stop making contributions altogether. It should be obvious to everyone that putting financial planning for your future on hold while you live and work abroad is not a good idea. Regardless of whether there is any deduction to be made from your taxable income, you will still benefit from making these contributions and should not stop. 

US expatriates can still contribute to an IRA up to the annual maximum of USD 5,500, or USD 6,500 if over the age of 50. Even if they do not receive the income tax deduction, the account still provides tax-free accumulation and has no annual reporting requirement. Furthermore, US expatriates can establish their own 401K and Defined Benefit plans while they live and work offshore. This will allow them to contribute up to USD 210,000 on an annual basis and again receive tax-free accumulation, with no annual reporting requirement. 

What some people choose to do is to invest in off-shore schemes and insurance plans. These plans offer no benefits for US taxpayers due to an annual reporting requirement in the US, which can be very complex because these products do not produce IRS compliant documents such as 1099s. Once they are reported, they will often be subject to higher taxes because they qualify as Passive Foreign Investment Companies (PFICs) and may have Excess Distribution Rules applied to them.  By comparison, all US investment accounts have tax advantages for US citizens and are much easier to report on an annual basis. 

To recap: 

1.    Do not stop saving just because you lose the ability to save on a pre-tax basis.
2.    Back in the US your tax treatment is better and reporting requirements are easier.

Other than the aforementioned qualified accounts, such as 401Ks and IRAs, what other investment opportunities are available where it is possible to take tax advantages?

To find out, continue reading on our sister site beijingkids.


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