Most Common Questions about Overseas Tax Filing for U.S. Citizens and Expats
This is the ninth article based on the IRS podcast: Overseas Filing for U.S. Taxpayers. We’ve covered various areas of filing requirements for U.S. taxpayers who live and work abroad, but if there is still information that is not quite clear to you, we’d like to answer some common questions about overseas tax filing in today’s article.
Q.1: What amount needs to be reported on an FBAR return? Is it the maximum value in the account or is it in year-end value in the account?
The FBAR form requires you to report the maximum value during the calendar year. So you are going to look at the highest balance during the calendar year. And you can go to the FinCEN website to get more information on the filing thresholds and what is included in filing your FBAR.
Q.2: If someone happens to own shares individually, and they are held in a brokerage account, would that be considered a foreign financial account that’s subject to FBAR or reporting on a FinCEN 114?
If you own shares of outside an account, the answer is no. The FinCEN 114 is for foreign financial accounts. When you hold stock outside of a foreign financial account, it’s not included on the FBAR; however, it may be required to be reported on the Form 8938. If you are holding shares inside a brokerage account, the entire value of the brokerage account, which may include cash and other securities, would be included on your FBAR form.
The streamline program is actually a great avenue for taxpayers who believe that they are non-willful. And what it does is it limits the number of years that you have to file. It focuses on six years of FBARs and three years of tax returns for you to come into compliance. And you will have to sign a certification statement why you believe that you are non-willful. So if you go to www.irs.gov, you can get lots of information about eligibility and how you can file for one of those programs.
Q.3: Can a taxpayer claim both a foreign earned income exclusion and the foreign tax credit?
There are choices that you can make. Nobody’s compelled to take a foreign earned income exclusion or a foreign tax credit. They’re options that you have available to you if you qualify to reduce your U.S. tax liability. The foreign earned income exclusion can be taken in connection with a foreign tax credit. But you have to be aware of the fact that there’s a reduction. If you take or claim the foreign earned income exclusion, then you want to reduce your foreign-source income that’s part of your FTC computation by the amount that you’ve excluded under the foreign earned income exclusion, because if you don’t, you’re basically getting a double benefit, and that’s not allowed. So, yes, while you can claim both the foreign earned income exclusion and the foreign tax credit, you just have to reduce your foreign earned income exclusion, usually in the general category on Form 1116 by the amounts of the foreign earned income exclusion that you claimed.
Q4. Can I choose whether or not to file a joint return with my U.S. nonresident foreign spouse?
The answer is yes. You can choose to make an election to file jointly or not. If you choose to make that election, be aware that both you and your spouse are going to be taxed on worldwide income and treated as U.S. residents for tax purposes. So that’s something to bear in mind when making the decision.That choice is revocable, however, you need to carefully consider whether you want to make the choice to revoke it, because once you revoke it you cannot reflect it.
Q5. If I can exclude all of my foreign earned income by taking the foreign earned income exclusion, do I have to file a tax return?
Yes, you do. You cannot just simply not file. You still have a duty to file a U.S. income tax return if you’re a U.S citizen or resident alien reporting your worldwide income, even if you are eligible to reduce or eliminate your U.S. tax by claiming a foreign earned income exclusion, or you are eligible to take a foreign tax credit and would owe no U.S. tax. You still must file a return. In addition, even if you are not required to file an income tax return, you may still have to file an FBAR. So they are related somehow, but they also have different filing requirements. So make sure you look each year to see if you meet the requirements to file the information return.
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