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Navigating the maze of estimated taxes for expats

Writer's picture: Timmoney NgTimmoney Ng

Updated: Feb 10, 2024




Let's unravel the often-confusing world of estimated taxes for US citizens and green card holders living and working in Singapore (and abroad generally). Yes, even miles away from home, Uncle Sam's tax reach extends globally, and understanding estimated tax payments is crucial to stay compliant and avoid unnecessary penalties.


What are estimated taxes?


Estimated taxes are periodic payments made to the IRS on income not subject to withholding. For expats, this might include earnings from self-employment, interest, dividends, rents, or other sources of income. Essentially, if you expect to owe $1,000 or more in taxes when you file your return, the IRS expects you to make estimated tax payments.


Why do expats need to pay them?


As a US citizen or resident alien, your worldwide income is subject to US income tax, regardless of where you live. Unlike domestic taxpayers, your income might not always have US tax withheld, hence the need for estimated tax payments to cover your tax liability.


How to calculate estimated taxes?


Calculating estimated taxes can be a bit tricky. You need to estimate your expected adjusted gross income, taxable income, deductions, and credits for the year. Form 1040-ES offers a worksheet to help you estimate these taxes. Remember to consider the foreign earned income exclusion and foreign tax credits, which can significantly impact your US tax liability. Your accountant should be able to calculate the amount of estimated taxes you'll have to pay to prevent penalties from applying. See safe harbors below.


When are estimated taxes due?


Estimated tax payments are typically made quarterly. For the tax year, the due dates are usually April 15, June 15, September 15, and January 15 of the following year. However, as an expat, if you don’t receive income evenly throughout the year, you might be able to make payments on different dates using the annualized income installment method. See the IRS website providing the due dates here.


Penalties for not paying estimated tax payments:


  1. Penalty calculation: The penalty for underpaying estimated taxes is essentially an interest charge on the unpaid amount. The IRS determines the penalty by applying an interest rate (which can change quarterly) to the amount of underpayment for the period of underpayment.

  2. Period of underpayment: The penalty is calculated from the time the estimated payment was due until the date it is paid or, if earlier, until the due date of the annual tax return.

  3. Annualized income method: For those who don’t receive income evenly throughout the year (a common scenario for self-employed individuals or those with irregular income), the penalty may be reduced by using the annualized income installment method, which allows you to make unequal payments based on when you earned the income during the year.


Safe harbors to avoid penalties: Safe harbors are specific conditions under which taxpayers can avoid penalties for underpaying estimated taxes:


  1. 90% of current year tax liability: If your estimated payments (combined with withholding and credits) total at least 90% of the tax shown on your current year’s tax return, you won't face a penalty.

  2. 100% of prior year tax liability (or 110% for higher income): Another way to avoid the penalty is to ensure your estimated tax payments equal at least 100% of the tax shown on your prior year’s return. However, for individuals whose adjusted gross income (AGI) on the previous year’s return was more than $150,000 (or $75,000 if married filing separately), this threshold increases to 110%.

  3. No tax liability in the previous year: If you had no tax liability in the prior year, you generally won’t face penalties for underpayment of estimated taxes in the current year. This applies if you were a US citizen or resident for the whole year and your prior tax year covered a 12-month period.

  4. Retirees and disabled individuals: There are special rules that might reduce penalties for individuals who are retired or become disabled during the tax year.


Special considerations for expats:


  1. Foreign earned income exclusion: If you qualify, you can exclude a certain amount of your foreign earnings from US income tax. This can reduce or eliminate the need for estimated tax payments.

  2. Foreign tax credit: You might be able to credit taxes paid to a foreign government against your US tax liability, impacting the amount of estimated tax you need to pay.

  3. Exchange rates: Remember to convert foreign income into US dollars using the appropriate annual exchange rate for accurate tax calculations.


Tips for making payments:


  • Electronic payments: The IRS encourages making payments electronically through the Electronic Federal Tax Payment System (EFTPS) or Direct Pay.

  • Bank account drafting: You can have payments drafted directly from a US bank account.

  • Mail: If electronic methods aren't feasible, you can mail checks or money orders to the IRS.


Paying estimated taxes might seem daunting, especially from afar. However, staying informed and proactive about your tax obligations can prevent surprises during tax season.


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Want to chat more about US tax? Find a time to connect with Tim here.


--- DISCLAIMER: EVERYTHING YOU READ ON THIS BLOG IS PURELY FOR YOUR INFORMATION AND ENTERTAINMENT. IT IS NOT MEANT TO REPLACE PROFESSIONAL LEGAL, TAX, OR ACCOUNTING ADVICE. SO, BEFORE YOU MAKE ANY BIG MOVES BASED ON WHAT YOU'VE READ HERE, PLEASE CHAT WITH YOUR OWN LEGAL, TAX, OR ACCOUNTING ADVISOR TO GET THE REAL DEAL ADVICE TAILORED JUST FOR YOU.


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DISCLAIMER: Everything you read on this blog is purely for your information and entertainment. It's not meant to replace professional legal, tax, or accounting advice. So, before you make any big moves based on what you've read here, please chat with your own legal, tax, or accounting guru to get the real deal advice tailored just for you.

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