10 Tips For U.S. Expats and Citizens with Foreign Income

10 TAX TIPS FOR U.S EXPATS AND CITIZENS WITH FOREIGN INCOME

Even as an Expat, you still need to file a tax return and, depending on your income, pay taxes, as long as you have a U.S. citizenship. Your worldwide income is taxable even if you filed a tax return and paid taxes in the country where you reside. If your taxable income is over $20,000 a year and you are married; or $10,000 and single; or made over $400 per year as self-employed or contractor, you need to file a tax return.

There is a long list of tax filing requirements the IRS has determine for Expats:

  • Automatic Extension until 6/15 but pay taxes on 4/15
  • Foreign Earned Income Exclusion (FEIE) of $104,100 only if return is filed
  • Spouses get another $104,100 of foreign earned income exclusion (FEIE)
  • If your income is over the FEIE amount, claim a house deduction
  • Credit for taxes paid in your country of residence
  • Foreign Account Tax Compliance Act (FATCA) reporting requirements
  • Foreign Bank Accounts Reporting (FBAR) requirements
  • Foreign companies ownership involves more IRS reporting
  • Foreign trust creation involves more IRS reporting
  • Self-employment income is subject to FICA (social security and medicare taxes)
  • The IRS is watching you
  • IRS special programs for Expats
  • Passive Foreign Investment Company (PFIC)

Foreign Earned Income Exclusion (FEIE)

FEIE is another method introduced by the IRS to avoid double taxation. It is generally meant for self-employed individuals who live and work abroad. FEIE does not exempt you from your Social Security tax liability. Tax credits can do that. With the new tax reform, it would be much more beneficial for expats to claim FTC than FEIE, since they can’t be received together. Here’s why:

FEIE:

  • There’s quite a lot of uncertainty to the exact changes that are coming with the tax reform.
  • Earnings under $100,000 a year qualify for FEIE.
  • Adjusted annually.

FTC:

  • Some countries have higher taxes than the U.S., especially after the tax reform.
  • Foreign Tax Credits will be worth more because the they can be used upon the taxpayer’s return to the U.S.
10 TAX TIPS FOR U.S EXPATS AND CITIZENS WITH FOREIGN INCOME

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U.S. taxpayers who live in abroad and/or who income from foreign sources, most report and file income tax returns the same other taxpayer receiving income from U.S. sources.

Foreign Income

Foreign income may have many sources such as income from foreign real estate, working for a foreign company, investments in foreign stocks.

FATCA

FATCA is for the reporting of financial assets held in foreign accounts over $50k for U.S. residents an $200K for U.S. expats if filing single.

FBAR

FBAR is for the reporting of financial assets held in foreign accounts over $10K for both U.S. residents and for U.S. expats regardless of filing status.

If you are US citizen, Resident or Expat and you hold accounts in a foreign bank or foreign financial institution with a balance that exceeds $10,000 at any time of the year, you are obligated to file Foreign Bank and Financial Accounts Report (FBAR).

Five Elements of FBAR Filing:

1. You must file if you are a citizen or US Person

U.S. Persons means:
  • U.S. Citizen
  • U.S. Residents
  • U.S. entities and any entity created or organized In U.S. or under U.S. law tax status disregarded.

2. You have a financial interest in or signature authority over an account

Financial Interest means:

  • If You are U.S. person and you hold title directly.
  • If You hold title for the benefit of a U.S. person.
  • If you hold title indirectly.

Signature Authority means:

  • You can control disposition of account assets.
  • It can be in conjunction with another.
  • By direct communication; Oral or written.

Signature authority does not mean:

  • Supervisory approvals.

3. That account is a Foreign Financial Account(s)

Foreign Account means: Outside the United States, which is:

  • States or foreign countries
  • D.C. Territories and Possessions
  • Indian lands
  • Physical location of account governs

Financial means:

  • Both monetary and non-monetary assets.
  • Bank, brokerage, and investment accounts; insurance and annuity policy cash values; and mutual funds are specifically named.
  • Generally not real and personal property.

4. The aggregate value of the account(s) exceeds $10,000 at any time during the calendar year

Aggregate Value Exceeds $10,000 means:

  • Aggregate accounts with financial interest and those with signature authority.
  • Aggregate accounts owned directly and those owned indirectly.

Reportable Accounts

  • Bank accounts checking, savings, CDs.
  • Securities or brokerage accounts (buying, selling, holding or trading stocks, bonds, etc.).
  • Other financial accounts.
  • Other deposit accounts.
  • Cash value of insurance or annuities.
  • Commodity futures or options accounts.
  • Mutual funds, or similar pooled funds.

Mutual Fund is defined as:

  • Issues shares to the general public and shares have a regular net asset value determination and regular redemption.

5. Reportable Account Exceptions

  • U.S. military banking facility.
  • Accounts of U.S. governmental entities.
  • International financial institutions.
  • Correspondent or Nostro accounts.
  • Held in a U.S. IRA (if owner or beneficiary).
  • Held in a tax-qualified retirement plan if participant or beneficiary.
  • Consolidated filing.

Click the Link Below and Check Our Free Taxclass U.S. Expats Reporting Obligations For Holding a Foreign Bank Account - FBAR

The Truth About FATCA

The Foreign Account Tax Compliance Act or FATCA was signed into law in 2010 and codified in Sections 1471 through 1474 of the Internal Revenue Code. The law was enacted in order to reduce offshore tax evasion by US persons with undisclosed offshore accounts. There are two parts to FATCA – U S taxpayer reporting of foreign assets and income on Form 8938 and reporting by a Foreign Financial Institution or FFI of foreign bank and financial accounts to the IRS. It is the latter that is resulting in FFI’s sending out that dreaded letter to suspected US account holders requesting US taxpayer identification and information referred hereafter as the FATCA letter.
FATCA generally requires an FFI to identify certain US accountholders and report their accounts to the IRS. Such reporting is done either through an FFI Agreement directly to the IRS or through a set of local laws that implement FATCA. If an FFI refuses to do so or otherwise does not satisfy these requirements (and is not otherwise exempt), US source payments made to the FFI may be subject to withholding under FATCA at a rate of 30%. Note that FATCA information reporting and withholding requirements generally do not apply to FFI’s that are treated as deemed-compliant because they present a relatively low risk of being used for tax evasion or are otherwise exempt from FATCA withholding.

Registration

All FATCA registration is directly with the IRS. Registration with the IRS is free of cost and mandatory for any FFI to become registered deemed-compliant under its country’s IGA. Only the IRS has the power to register a FFI and issue a GIIN. Enabling legislation by the foreign country is irrelevant to FATCA registration for FFI’s as no foreign country revenue authority has the power to register a FFI and issue a GIIN. Again, we emphasize, this must be done directly with and by the IRS. The truth is, a foreign country’s enabling legislation is simply intended to provide the legal framework for compliance with, not avoidance of FATCA (and other automatic tax information exchange agreements), and the development of the regulatory framework for operating the agreement.

FFI

A FFI is treated as FATCA-compliant, and not subject to FATCA withholding tax, to the extent it complies with its obligations under the IGA. The U.S. Treasury regulations are incorporated by reference into the IGA. Under the IGA, the foreign country is bound to use U.S. Treasury definitions to the extent those definitions are not defined by the IGA, and importantly, the foreign country is not permitted to use any other definition in local legislation that would frustrate the purposes of the IGA.

FRO

Under the IGA a FATCA Responsible Officer (FRO) must be appointed who is (a) as an officer of the registered deemed-compliant FFI with sufficient authority to ensure that the FFI meets the applicable registration requirements and (b) who certifies that the FFI will comply with its continuing FATCA obligations.

FRO and Responsibilities

FRO’s have serious compliance responsibilities under FATCA. In fact, FATCA compliance revolves around the FRO, like Sarbanes Oxley compliance revolves around the CFO. Especially in the context of a FFI that does not typically have any staff, the role is even more essential. It’s a fallacy and wishful thinking that FROs can be lax or lite under the IGA. The IRS has consistently expressed its expectations that FRO’s deliver robust FATCA compliance and high-quality FATCA information from either procedure.

Key considerations for a FRO under the IGA include:

  • Willfully submitting any fraudulent or materially false document to the IRS is a Federal offence. [IRC §§7206(2) & 7207]
  • FFI’s self-certification as a Reporting Financial Institution to withholding agents will entail signing the IRS Form W-8 under penalties of perjury.

The Truth

As of July 1, 2014, FATCA went into full effect, which means that FFI’s now have to report the required FATCA information to the IRS. Many FFI’s are making a full effort to comply with FATCA. As part of this effort, FFI’s around the world have been sending out FATCA letters. A FATCA letter is basically a letter from your bank or other financial institution which introduces FATCA to their customers and asks them to provide answers to a various set of questions aiming to find out information specific to FATCA compliance. Often, instead of asking all of these questions directly a FATCA letter would simply list out a series of forms that contain these questions such as IRS Forms W-9 and W-8BEN.

The information furnished by the customer to the bank would then be used by the bank to report information on the customer’s foreign accounts to the IRS. If the customer refuses to answer the questions or provide the necessary forms, the financial institution would often close the account and report it as a recalcitrant account to the IRS. Once that is done, the government will look to see if your account ever had in excess of a $10,000 balance. If it did and you did not report it on an FBAR or on your federal income taxes, the case will likely be referred to the IRS Criminal Investigation Division. At that point, the government will begin to build a case against you. A U.S. citizen can be sentenced up to five years in prison for each year that they willfully failed to file an FBAR and can be penalized up to 50% of the balance of the foreign account for each year that they willfully failed to report (up to 250% of the account’s balance). The civil penalties alone can easily reach double the amount of the balance of the account in question.

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