Professional Tax Services

I am an American living and working abroad. Do I need to file a US tax return?

Regardless of where you live now, being a United States citizen requires that you file a yearly tax return with the IRS. Green card holders and all US citizens are required to file a US return, no matter where they live, The US has treaties with many foreign countries that will reduce or even eliminate actual owed tax. You cannot, however, take advantage of these benefits if you don’t file.

What if I am self-employed?

You need to be aware that the Foreign Earned Income Exclusion refers only to income taxes; you are still subject to self-employment taxes even if your business is overseas. This means that you may need to be filing quarterly estimated tax payments throughout the year.

What if my spouse is not a US citizen?

If your spouse is neither a US citizen nor resident alien (green-card holder), you have a few options. You can file as Married Filing Separately, meaning you would report only your own income. If you have children and you provide more than half of their support, you may qualify to file as Head of Household. Or, as a third option, you may elect to treat your spouse as a resident alien for tax purposes, and file as Married Filing Jointly. This would mean you would report both of your incomes, which sounds unattractive. Because there is a higher standard deduction for filing jointly than for filing separately, as well as various other ways in which the tax code treats joint filers preferentially, you may be better off filing jointly.

Do I need to file a State Tax Return?

As is the case with many legal matters, each US state sets its own rules regarding state taxes and expats. Some states do demand that you file a state return, while others release you when you move away.

What forms do expats need to complete for their Federal Income Tax Return?

Just as you did when living in the US, you need to fill out a 1040 form. The forms specifically applicable to your life as an expat are 2555 and 1116. These are the forms by which you declare your foreign earned income and qualify for the Foreign Tax Credit. If you have a foreign bank account you would also need to complete informational forms TDF 90-221 (FBAR) and, new in 2011, form 8938.
How do I know if I qualify for the Foreign Earned Income Exclusion?

The IRS qualifies you as eligible for the Foreign Earned Income Exclusion (FEIE) if you fall into one of three categories:

1. You are citizen of the US who qualifies as a bona fide resident of another country for a period of time containing one entire tax year.
2. You are a resident alien of the US whose home country has an income tax treaty with the US. Additionally, you must be a bona fide resident of another country for a period of time containing one entire tax year.
3. You are a citizen or resident alien of the US whose physical absence from the US constitutes a minimum of 330 days out of any 365.
Bona Fide Residence Test

To qualify as a bona fide resident of a foreign country, you must live and work in a foreign country or countries for an uninterrupted period that includes an entire tax year. However, living overseas for a full year is not sufficient for establishing bona fide residence. The determination is based on your actions and intentions with regard to the ties you set up in your foreign post, the conditions of your employment, and so forth. The IRS makes this determination based on your answers to Form 2555, the foreign earned income exclusion.

Physical Presence Test

You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive. This test is based only on how long you stay in a foreign country or countries and does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad.

What does “earned income” include?

Income that must be reported, even if eligible for the Foreign Earned Income Exclusion, comprises more than just salary. Earned income includes as well: commissions, bonuses, professional fees, tips, the fair market value of lodging, meals, or use of a car provided by your employer; cost of living allowances; overseas differential; family allowance; education allowance or reimbursement (unless you are employed by the school concerned); home leave allowance, and housing allowance. Some other types of income such as business profits, rents, and scholarships may be considered earned income as well, depending on the situation.

Can housing expenses be excluded or deducted?

It is sometimes possible to exclude and/or deduct housing expenses when living overseas. Rent, repairs, utilities and insurance are some of the things that might be deductible either in part or in whole.
Can I deduct foreign taxes paid?

As a general rule, tax you owe the US on foreign income can be substantially reduced or even zero if you have already been taxed on said income in your country of residence. You can claim these paid taxes either as credits on your Federal return or claim each amount as an itemized deduction.

When is my tax return due?

For Americans living within the US, the tax return is always due on April 15th or the following Monday (if the 15th is a weekend or a holiday). A two month extension is automatically given to citizens living abroad putting the expat due date (for filing purposes) at June 15th. The two month extension is automatic, but an additional extension can be filed for if needed. The filed-for extension moves the due date (for filing purposes) as far back as October 15th. Neither of these extensions applies to paying taxes. Any taxes owed, regardless of whether you are stateside or abroad, are due on April 15th.
What about my foreign bank accounts? What are FBAR and Form 8938?

Form FinCEN Report 114 also known as FBAR. This is a relatively simple form that is used to collect basic information on foreign financial account controlled by a US citizen. The form is sent to the Treasury Department and is not filed with your tax return. As it is only an informational form, it will not have impact on your tax liability. Financial account definition includes: a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts. The FBAR must be received by the Department of the Treasury by June 30th. There is no extension for filing this form. The FBAR should be sent to a different address from your tax return. It must be e-filed.

FBAR Penalties. The penalties for non-filing of the FBAR are extremely harsh. They range from an automatic penalty of $10,000 to 50% of the balance of the account. It gets worse – if the IRS investigator can prove that you willfully withheld the information from the government criminal charges can be filed.

Form 8938. Starting fiscal year 2011, Form 8938 must be attached to your 1040. The reporting requirements of foreign financial assets are more extensive and more complicated than those for the FBAR. The threshold of foreign assets owned depend on where one is domiciled and whether one is filing married filing jointly or otherwise.

Form 8938 is required under the Foreign Account Tax Compliance Act (FATCA), passed into law in March 2010. FATCA also requires foreign financial institutions banks, brokers, pension funds, insurance companies, hedge funds, mutual funds, trusts to report to the IRS holdings of their clients who are U.S. persons. This will come into force on January 1, 2014 and will allow the IRS to cross-check between reports of foreign financial institutions and individual filings of Form 8938. All institutions that do not comply will have a 30% withholding tax imposed on all its transactions concerning U.S. securities. In addition, FATCA will require that any foreign company not listed on a stock exchange or any foreign partnership which has 10% U.S. ownership to report to the IRS the names and tax I.D. number (TIN) of any U.S. owner.

What should I do if I haven’t filed in several years?

In September 2012, the IRS announced a new “streamlining” program for overseas non-filers. If you meet the requirements to be deemed “low-risk,” you can file just three years of missing returns, along with six years of missing FBAR forms, and the IRS will not pursue an earlier missing returns. If the IRS has already requested missing returns, then you’ll need to go back as far as they ask.
If the IRS audited you and found out that you have significant tax liability for the years that you didn’t file, they can deny your foreign earned income exclusion.

What is the Foreign Tax Credit?

If you pay income taxes to a foreign government, you may be able to take a credit for those taxes against your US income tax bill. This is to save you being taxed twice on the same income. As a practical matter, if your income is fully excluded under the Foreign Earned Income Exclusion, such that you owe no US income tax, then the Foreign Tax Credit is often irrelevant. (It can be used to reduce your tax bill, but only to zero. It cannot be claimed as a refund.) There are some circumstances where you may be better off taking the Foreign Tax Credit and not the Foreign Earned Income Exclusion.

Comments