Top 10 things US citizens abroad should know about their taxes
The US tax system is complex to say the least, and individual variables for each person are what makes the preparation of each tax return unique. Hard as it is to believe in the current climate, there are still Americans living abroad who do not think they have to file tax returns to the IRS at all, and others who have been incorrectly filing.
As a result of our experience with this, we’ve compiled 10 important things to keep in mind about US tax:
US citizens and US tax residents (green card holders regardless of domicile) are responsible for reporting their worldwide income regardless of where they. This includes wage earnings, self-employment income, rental & other passive income, interest, and dividends. While a US taxpayer may not owe any US income tax, generally, they must file the appropriate US income tax returns and forms. There are also various informational returns that may be required (see FBARS below as but one example) which carry large penalties for failure to file.
Additionally, non-resident aliens may be required to file a US return depending on the type/amount of US source income they may have and if US taxes were correctly withheld at source or not.
US taxpayers are required, under certain circumstances, to file electronically FinCEN form 114 (previously called form TDF 90-22.1) to report their ownership in certain foreign financial accounts (bank accounts, investment accounts, brokerage accounts, and possibly life insurance policies and certain foreign retirement accounts). This includes accounts individually owned, jointly owned or accounts for which the taxpayer has signature authority over. The 2015 FBAR is due to be filed by June 30, 2016 with no possibility of extension.
US taxpayers living outside the United States on April 15th, 2016 have an automatic extension to file their 2015 return until June 15, 2016. That being said, in order to avoid interest, any tax owed should be paid by the April 15th filing deadline. For this year the filing deadline is Monday, April 18, 2016 due to a public holiday (for Maine and Massachusetts residents the date is Tuesday, April 19 due to an additional holiday observed in those states).
4. CERTAIN FOREIGN EXCLUSIONS/CREDITS
There are certain exclusions and credits potentially available for US taxpayers who reside overseas. The foreign income exclusion, the foreign housing deduction and foreign tax credits are at a US taxpayer’s disposal to help avoid double taxation of their income. Depending on where one lives, it sometimes is better to claim the foreign tax credit only, while in other places, it is better to claim both the foreign income/housing exclusion in conjunction with the foreign tax credit. It is important to speak with a knowledgeable tax advisor regarding these issues.
Sometimes mistakes are made. Depending on the mistake and when it was made, the return and/or FBAR can be corrected by filing an amended return/FBAR.
US taxpayers need to be wary of their investments in foreign jurisdictions. As but one example, there is a type of investment called a passive foreign investment company (PFIC) which can have adverse tax consequences for US taxpayers. As a general statement, a PFIC is a foreign fund, along the lines of a US mutual fund. PFIC investments require special reporting on a US tax return and the sale of a PFIC or dividends from PFICS require special calculations for US tax purposes.
Thanks to the Foreign Account Tax Compliance Act, otherwise known as FATCA, many banks worldwide are now required to identify and report information on their US customers to the IRS. This legislation has led to some financial institutions even refusing the business of US customers. If a letter has been received from a bank concerning US compliance, contact us to discuss the options.
8. VOLUNTARY DISCLOSURE
For US taxpayers who are non-compliant (have never filed or have not filed for multiple years) or for those US taxpayers that have unreported foreign income/assets on previously filed returns, there are a number of options available to get back into the good graces of the IRS. We are available to discuss these options.
9. STATE TAX
Certain US states have their own tax return requirements. These can sometimes be overlooked, especially when the US taxpayer lives overseas. If, for example, a US person has a US rental property, owns a share of a US partnership or has US work days, they very well may have a state filing requirement.
10. TAX-FREE INVESTMENTS
Many investments that are tax-exempt in a foreign country do not have similar tax-exempt status for US purposes. The typical example is a foreign pension plan, either from a company or an individual retirement type plan (similar to US IRA’s) found in various foreign jurisdictions. It is important to discuss these types of investments with a qualified tax provider before opening up such accounts.
If you wish to discuss any of these items or another tax issue, please contact us.