U.S. Expats Tax Filing Strategies
If you are a US citizen, you should keep in mind that even living abroad you have tax obligations with the IRS that you must comply with to avoid future penalties. The ignorance of these obligations is something common among our clients. Below we share the main questions that our clients send us so that you can start preparing your tax plan.
Do U.S. Expats Have To Pay U.S. Taxes?
The first thing all U.S citizens need to know that even when they live in another country outside of the U.S, they still have to report and pay taxes to the IRS. Whether the income comes from having consulting jobs, being self-employed or an employee with the approval of a foreign company. Also need to report FBAR to the US Treasury if they own a foreign account with a balance of $10,000 or more.
However, most Expats don’t file taxes whether it’s because of lack of knowledge or simply are not willing to file income tax. In 2018 a new tax reform requires that US citizen that have foreign companies must report the profits they have to the IRS. Trust funds in foreign countries are also considered in this tax reform, even if the fund is not distributing money.
What Are The Tax Obligations For U.S. Expats?
If you’re an employee and earn over $110,000 you must pay taxes over that amount and claim the taxes already paid. However, you can’t claim the taxes paid in a foreign country. The reason you can’t claim is because the IRS gives a break so one can only claim a portion of the taxes paid in a different country.
The second tax obligation comes into play when you are self-employed and paying taxes in the foreign country you live in. This specific situation is called Equalization Agreement, when living in a certain country a person can opt out of paying their taxes and choose to pay US taxes. Keep in mind that this agreement won’t work when you are an employee and is required by law that you pay taxes in that foreign country and must pay Social Security in the US.
Finally, you must pay tax and report any bank account to the US Treasury, you have to report any foreign business or company when you own 10% or more and report on the personal income tax return any trust you may have. Otherwise, the penalty will be over $10,000. Click here to start your tax planning for U.S. Expat.
How Much Tax Do American Expats Pay?
Expats pay taxes depending on the level of income they have in their foreign country. There is a starting line for paying taxes and that is $110,000 which means that you will have to pay taxes over the portion that exceeds that amount. The reason behind paying taxes even when living in a foreign country is so an expat will be able to receive taxes from Social Security when they retire.
How Can U.S. Expats Avoid Paying Taxes Abroad, If They Do What Is The Easiest Way For Not Paying Taxes As An Expat?
The easiest way is to earn less than $110,000 and working for company, this means being in payroll and contributing to that country’s Social Security. However, if you’re self-employed an expat can’t really avoid paying US taxes.
What Happens If I Don’t File Taxes While Living Abroad?
When living abroad and failing to file taxes, whether due to lack of knowledge or willingness, an expat must file taxes. The IRS currently has a program that requires the filing of taxes for the last 3 years when there has been income earned. You can file taxes when there has been bank account failed to be reported to the US Treasury for the last 6 years.
How Does IRS Know About A Person’s Foreign Income?
The IRS has signed agreements with all the banks in Latin America. This agreement is called the FATCA and it requires that all banks report to the IRS the existence of any account owned by a US Citizen in a foreign country and foreign bank and of course its balance.
How Long Do You Have To Be Out Of The Country To Not Pay Tax?
For this there is no limit, the only way to not pay taxes if a person renounces to their citizenship. And of course if an employed person earns less than $110,000. Click here to start your tax planning for U.S. Expat.
Check Our Tax Planning For U.S. Expats
How Do I File My USA Taxes From Abroad?
There are many programs for a person to file their taxes, one of them is TurboTax but its specially designed for US Citizens living within the US. The best way to file your taxes while living outside the US, is hiring a professional CPA well-versed in expat taxation.
Can U.S. Citizens Living Abroad Claim Child Tax Credit?
This figure is not really possible because these credits are designed only for US Citizens living in the US.
What Tax Form Does, The U.S. Citizens Living Abroad Have To File?
The form expats have to file is form 1040 and the FBAR for the US Treasury that reports the bank account that hold more than $10,000. If you have a foreign company, an expat must file form 5471 which is a balance sheet and Profit and Loss report. Click here to start your tax planning for U.S. Expat.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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