U.S. Expats Tax Filings Cheat Sheet
Tax reporting obligations
US income tax return filing is different for people born in the US and living abroad:
- In order to report worldwide income, the US citizens and resident aliens have to file Form 1040, 1040A, or 1040EZ. This is also valid in cases when the person has US income source or the income is coming from another country from where tax is being deducted from it.
- Things to report include dividends, wages, compensation for service and all interests. A person who is a non-resident alien and is engaged in the trade of business in the US needs to file US income tax return. Refund overpaid or withheld tax can also be claimed by a non-resident alien if he wants to claim an alien refund. This can also be done if there is a need to claim the benefit of credits and deductions.
- For instance, a non-resident alien having no business activities in the US but receiving income from real property as effectively connected income then he needs to file the true return in order to take allowable deductions against this income.
Another situation can be when you are married and one spouse is non-resident alien and the other one is a resident alien or US citizen:
- For the tax purpose, you can treat non-resident spouse as US resident. This is possible in cases when one spouse is non-resident alien at the start of the year and resident alien in the end while the other spouse is non-resident alien at the end of the year.
- There are some rules that apply to making this choice. In the first place, you and your spouse will be treated as US residents for income tax purpose for all tax years and you will have to file joint income tax return for the year when you make this choice. On this joint income tax return, each spouse has to mention his worldwide income.
- Be careful if you select this choice because your tax bill can be doubled. Better to report Married Filing Separate.
Standard Deduction and Personal Exemption
Standard deduction amount varies according to your filing status. It is the dollar amount that reduces the income amount on which you are taxed:
- For People who are above age 65 years and who are blind, some additional standard deductions are also available. If you itemize deduction then you will not be able to take a standard deduction. Some individuals can only take a reduced standard deduction or cannot even take standard deduction if they are claimed on another person’s tax return.
- Taxable income is reduced with exemptions. In 2016 for each exemption you claim you can deduct $4,050. If gross income of a person is above the certain amount he can lose a part of or all exemption.
- Two main types of exemption are there that a person can take and they include an exemption for yourself, for spouse and for dependents.
- If someone is married and one spouse is a resident alone and the other one is a non-resident alien, then he can choose to treat non-resident spouse as US resident. This is applicable in situations when one spouse is non-resident alien at the beginning of the year and non-resident alien at the end of the year, while the other spouse is a non-resident alien.
- When a couple makes this choice some rules apply. Firstly, you and your spouse are treated as US resident for all tax choices in effect. In addition, a joint income tax return must be filed in the year this choice is made. As a resident of the foreign country neither you nor your spouse can claim tax treaty benefits and both will be taxed for their worldwide income.
- However, a resident alien can claim a tax treaty benefit on specified income. In order to make this choice, a statement is needed that should be signed by both spouses for a joint return for the first tax year in which choice is applied. Important documents that are needed to be attached include a declaration that one spouse was a non-resident alien and other was a US citizen or resident alien. You also need to choose to be treated as US resident for the whole tax year. Name, address, social security number and tax identification number of each spouse should be provided.
Foreign Earned Income
Additional child tax credit can be claimed at the beginning of the year 2016. This would be shown in the Form 1040 line 67. This claim can be made if you have filed Form 2555 foreign earned income exclusion:
- The maximum amount of earning in case of self-employment subject to social security is $118,500.
- In order to claim foreign housing exclusion or foreign earned income exclusion, you need to have foreign earned income. The tax sum should be in a foreign country and you must be a US resident alien who is a citizen or a nation that is a bonafide resident of a foreign country for an uninterrupted period that includes the whole tax year.
- If you complete appropriate part of form 2555 you can choose foreign housing exclusion or foreign earned income exclusion.
- In addition above, deduction or exclusion from gross income can also be claimed for housing amount if tax home is present in a foreign country. However, for this, you need to qualify for deductions and exclusions under physical present test or bonafide residence test.
- For employed provided earnings the foreign earned deduction applies only to amounts that have been paid with employer-provided funds. As foreign housing exemption applies to amounts paid for self-employment earning so someone who is not self-employed cannot take foreign housing deduction.
- Housing expenses are those that are reasonable expense incurred or paid for housing in the foreign country. While calculating deduction and exclusion for foreign housing cost, housing expenses are considered only for that part of the year when you qualify for foreign earned income exclusion.
Foreign Tax Credit
US citizens, as well as residents, are charged tax for their income in the US and also all over the world. US resident aliens and citizens working in other countries are also taxed by these countries for their money that is called as non-US sourced income:
- In this situation, an individual is subjected to double taxation. This double taxation can be relieved with the help of foreign tax credit form or FTC. FTC helps reduce US taxpayer liability of tax by tax incurred or paid in a tax year. FTC is a non-refundable type of credit and hence it is important to ascertain that the income is sourced from a foreign country or from the US.
- According to IRC or Internal Revenue Code sourcing of income refers to income that has been earned in the US or from a foreign country. In order to figure taxable income on different categories of income using Form 1116, whether the gross income is from outside US source or from the US. Income from the US sources is originated from the US and is determined by the treaty or tax law.
- Publication 514 gives more idea about the coverage of income.
- As foreign tax credit is calculated on the basis of foreign source income, it is critical to source your income. At the same time, correct source income must also be included in the correct income category.
- There are five categories that they can be included and sourced on Form 1116. Two main categories are a general category and passive category. In addition to this, there are three other categories as well including lump sum distribution, income resourced by treaty and 901-J income.
- But two main income sources that are passive and general category are more important and together they are called as “baskets”. Interest income in case of a passive category may be sourced on the basis of payer and not on the residence of the payer.
- In case of wages, salaries and other forms of compensation it is seen whether the salary comes from the US or foreign source. The allocation between the two is made if compensation for labor or personal service is earned both from inside and outside the US.
Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury. FinCEN was passed as Bank Secrecy Act that was used to identify and report any kind of suspicious activity such as money laundering and tax evasion etc. FinCEN and Bank Secrecy Act require all institutions in the US to give five kinds of reports to the government. According to this act, individuals are required to provide FinCEN Form 114 with information and it is known as FBAR. Most of the taxpayers and tax preparers did not know the requirement of filing of FBAR before but after the US announced its first offshore voluntary disclosure program in 2009 it became clear to everyone:
- There are categories of people who required FinCEN Form 114 that is also called as FBAR form. In this case, one needs to be the US citizen. This applies to children as well and also to a person who is a US citizen and belongs to the territory, trust, cooperation or estate in the US that is run under the US laws.
- The person must also have interest in signatory authority over the foreign financial account. The foreign financial account is the financial institution or bank that is located outside the US. Another requirement is to file aggregate balance of the account is more than $10,000. Aggregate balance means a combined balance of all the accounts. For instance, if someone had two bank accounts one with balance $5,000 and another one with balance $8,000 then the aggregate balance will become $13,000. As this aggregate balance is above $10,000 threshold so the person is required to file FBAR.
- Deadline for filers who have to file FBAR for 2017 the deadline will be April 16th, 2018.
- FBAR is reported online only: http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html
Form 8938 is a part of Foreign Account Compliance Act or FATCA:
- The purpose of FATCA is to identify and target noncompliance by the US taxpayers having foreign assets. Certain specific foreign financial assets of the taxpayers are reported that primarily involve offshore assets and other financial accounts.
- Foreign financial institutions are reported to the foreign financial account that is created on the names of US taxpayers. Foreign entities in which US taxpayer holds ownership are also taken into account in this regard. In cases when the total value of the asset goes above the threshold the US taxpayer gets the responsibility to report about foreign financial accounts.
- For this, Form 8938 is applied and income tax returns are attached to it. People who are needed to file Form 8938 include individual residents, US citizens and a limited number of non-residents who maintain certain foreign financial assets. They need to report their assets on Form 8938.
- Individuals with the value of total financial foreign asset below the given threshold do not need to fill this form. Therefore if at the end of the tax year, a person’s total value of the asset is under $50,000 or $200,000 for an Expat, filing as Single, then no reporting is needed for that particular year. Thresholds are different for married filing jointly: $100,000 or $400,000 for Expats.
Global Intangible Low Taxed Income or GILTI
The Trump Tax Reform created Section 951A of the Internal Revenue Code and will likely have a huge impact on those American Expats who own foreign companies. This new tax is applicable starting in 2018. These new regulations expand Subpart F income (Schedule F reports foreign income and similar to Schedule C reporting self-employed income), so individuals or trusts owning stock within controlled foreign corporations or CFC (U.S. citizens or residents owning over 10% of stock), whether through LLCs or S corporations or directly, will pay higher taxes.
The net income from a foreign subsidiary company CFC that you as a U.S. citizen or resident own, will be added to your regular income on your tax return to determine the additional tax liability. You will be able to deduct taxes paid in the country where the CFC is located. Foreign companies created for holding personal real estate will be subject to the calculations and reporting but will pay no tax. Foreign trust are exempt of this tax calculation, reporting and payment because they have their own set of regulations and reporting to the IRS. The GILTI is a new tax for the net income coming…
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