U.S. Expat Taxes Cheat Sheet
U.S. Expats 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.
U.S. Expats Standard Tax Deduction and Personal Tax 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.
- 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 (FEI)
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.
Obligations and rights related to a foreign corporation or an LLC
- You need to file special IRS forms if you own 10% or more of a foreign corporation or an LLC to avoid large penalties and criminal prosecution. This may require you getting expat tax help to ensure everything is done correctly and on time.
- When forming a foreign business entity you should make the right tax election to save yourself a considerable amount of taxes. An experienced expat tax accountant would be able to advise you correctly.
- A Subpart F income tax applies to US shareholders of a foreign corporation.
- Investors in a foreign corporation may be required to file a PFIC form in addition to their return and may incur further taxes on their income. Contact a certified expat tax accountant to explain these forms in detail and guide you through all the applicable expat tax rules in your particular situation.
Deductions you can claim
If you exceed the foreign earned income exclusion amount you can deduct housing expenses for:
Self-employment expat tax rates
- The self-employment expat tax rates are 15.3%
- In a small number of countries, in which you may reside, you may be allowed to pay your social security locally, rather than in the U.S.
You are required to submit the forms 3520 and 3520A in addition to your expat tax return if you are an owner or a beneficiary of:
- A foreign trust
- A foreign non-profit organization
- A foreign foundation
Dodging won’t work
If you think you dodge expat tax filing and get away with it, you should reconsider. The IRS works with an increased number of specialists, employed specifically to go after expats who don’t file or pay their taxes in the US. When you eventually get caught, you may suffer severe consequences, including criminal charges. Click here to start your tax planning for U.S. Expat.
Social Security Tax and Income Tax Withholdings
If you are employed by a US company but you work overseas, your employer may withhold income and social security taxes from your earnings. It may, though, be to your advantage to have your employer discontinue making these deductions, especially if you expect to qualify for the income exclusions afforded to you under the bona fide residence test or the physical presence test. Reference can be made to Publication 54 for more information in this regard.
When a US Employer does not deduct income taxes from your foreign earnings, or fails to deduct enough, you will most likely have to pay estimated tax. Estimating the tax is done by estimating your income tax and self-employment tax for the year, and then deducting the estimated withheld tax.
Gross income is then estimated by excluding the estimated taxes as described above. You may also deduct the estimated housing exclusion or deduction in this calculation. Be aware, though, that underestimating the housing amount may result in penalties for underpayment of the relevant taxes.
Estimated tax for Individuals is calculated using Form 1040-ES. This helps you estimate the tax due for a particular year and generally applies the same requirements for filing and paying estimated tax as you would if you were in the US.
Withholding tax from pension payments
If you are the recipient of any of the following types of benefits you would have to choose an exemption from the withholding of taxes on benefits paid to you:
- Employer-deferred compensation plans (for example, annuities, employer pensions and profit-sharing plans);
- Commercial annuities; and
- Individual retirement plans.
If you don’t choose an exemption, taxes will need to be withheld from these payments. The exemption can only be applied if you supply the payer of the benefit with proof of a US residence address, or US possession, or make a certified declaration to the payer that you are not a resident alien, or a US citizen, or a person who only left the US for the principal purpose of avoiding to pay US tax.
You will need to refer to Publication 575, “Pension and Annuity Income”, to see the rules that apply to non-periodic distributions from tax-sheltered annuity plans and qualified employer plans.
The Social Security Administration (SSA) is not required to withhold federal income tax on benefit payments paid to US recipients who live either in the US or in foreign countries. The recipients of benefits can, however, request voluntary income tax withholding. There is a complex set of rules that apply to the deduction of US income tax payable on these benefit payments, and the preference to voluntarily have income tax withheld, but this subject is too complex to cover here. You are advised to check with an experienced tax practitioner whether your SSA payments will be subject to income tax and whether it is advisable to request a voluntary withholding of income tax from these benefits.
You need to take note that not all foreign countries have tax treaties with the US, which means you may find your foreign income taxed in that country as well as in the US. You will need to investigate this carefully to be sure what applies to you in your set of circumstances.
US Social Security Taxes
Under normal circumstances an employee working for a company within the US will pay his share of social security taxes, and his employer will be liable for a share of taxes also. Even if that employee has to perform work on behalf of that employer in a foreign country, these social security taxes will still be payable. Some foreign countries may also require the employer to pay the social security taxes in a foreign country while the employee is working there.
If an American company is the principal owner of a foreign subsidiary company, its employees who work there may also be liable to pay foreign social security taxes. A ‘totalization agreement’, which is the social security equivalent of the tax treaties the US enters into with foreign countries is administered by the SSA and is valid to avoid double social security taxation.
The following foreign countries had totalization agreements with the US: Australia, Austria, Belgium, Canada, Chile, Finland, France, Germany, Greece, Ireland, Italy, Japan, South Korea, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. An agreement is pending with Poland. In some countries agreements have been signed but have not yet taken effect. These countries are Denmark, Mexico and Czech Republic.
In the situation where you work overseas for a company that is principally owned foreign subsidiary of a US company, or are directly employed by a foreign employer, you will not be liable for US social security taxes. Click here to start your tax planning for U.S. Expat.
Check Our Tax Planning For U.S. Expats
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.
- 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
When to file FBAR
As a US expat, you are required to file FBAR form:
- If at any point during the year the total sum of your foreign account balances equaled or exceeded $10,000
- By April 15th (previously June 30th)
Failure to do that can result in serious IRS penalties and you should consult with an expat tax accountant to prevent potential fall into debt due to fines and interests.
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 (GILTI)
GILTI, or global intangible low-taxed income, was created by the TCJA of 2017, and it creates a new category for foreign income to be added to corporate taxable income each year.
The calculations for GILTI inclusion amount are primarily driven by this formula: GILTI inclusion amount = net CFC tested income – NDTIR (net deemed tangible income return). There are many defined terms and other supporting formulas in order to understand how to use this primary formula.
The GILTI rules (contained in the new section 951A) require a 10 percent U.S. shareholder of a controlled foreign corporation (CFC) to include in current income the shareholder’s pro rata share of the GILTI income of the CFC. The GILTI rules apply to C corporations, S corporations, partnerships and individuals.
Tips For U.S. Expats For Tax Filing
Filing your taxes in the United States as an expat does not need to be as intimidating as it seems. We’ve compiled a list of some of the most important key take away to help you navigate the maze of taxes.
- Foreign Account Compliance Act or (FACTA) is to target US tax payers who aren’t compliant with reporting assets held in foreign institutions. This also applies to U.S. residents with ownership in foreign entities. Form 8938 is used and included with tax returns. Thresholds that do not require reporting are $50,000 or $200,000 for an Expat for a single filer or $100,000 or $400,000 for an Expat for couple filing.
- Financial Crimes Enforcement Network or (FinCEN) was established to identify and report any suspicious activity or money laundering. They require all banks to report to the government. Individuals are required to use FinCEN form 114 also called FBAR form. Required for US citizens that have signing authority over a foreign account held in a foreign institution. The form must be filed when the aggregate balance is $10,000 or more. The deadline to file is April 15th or October 15th for an extension.
- US citizens all over the world that are earning money outside the US get charged taxes by the US as well as the country they are in. This double taxation can be relieved somewhat with a foreign tax credit. Form 1116 is used to try to calculate what is due and what will be credited. There are five different categories that can be used on the form but the two most important are general or passive income.
- Within certain guidelines you can apply for a foreign tax credit or foreign housing expenses can be calculated and deducted assuming you are earning foreign income and living in the foreign country for an uninterrupted period that included the tax year in question and you must be a resident of the foreign country and able to prove that. The maximum amount for self-employment earning subject to social security is $118,500. The foreign earned deduction can be taken if employer provided funds pays funds earned. The foreign housing expenses can only be deducted by those who are self-employed, and not by those who are employed by an employer.
- Standard deductions and personal exemptions will vary depending on your filing status. If you itemize deductions, then you cannot take the standard deduction. Taxable income can be reduced with exemptions. If gross income is above a certain amount then exemptions will be reduced or eliminated.
Exemptions are usually taken for yourself, spouse or dependents and can vary depending on the situation.
- If you have a non-resident spouse then for tax purposes you can treat them as a US citizen and you can file jointly but all income earned worldwide for both spouses must be reported. This could double your tax implications and it may be better to file married filing separately.
- Form 1040, 1040a or 1040EZ should be used to report worldwide income. Every person in the U.S. who has earned any sort of income must file even if they are not a U.S. citizen if they earned income from a U.S. entity. Any deductions or refunds also need to be attached at a U.S. tax return. If someone from another country earns income from a real property in the United States, then they need to file a U.S. tax return to show any deductions etc.
This is not an exhaustive list, but should be enough of a complied list of things to consider to know what you need to do to file your taxes in the United States as an expat. You can always use the help of a qualified CPA who has experience and knowledge about filing as an expat to make sure you don’t make any costly mistakes and to make sure you are deducting all applicable deductions to lower your tax implications.
How Expats Can Fix Debt Problems With the IRS
Every US citizen or permanent resident is required to file a tax return every year, no matter where they reside.
- Failure to file a US personal income tax return could result in a loss of the Foreign Earned Income Exclusion, which can create a difficult situation US citizens living abroad. This exclusion legally eliminates the tax on income earned outside of the US.
The Foreign Earned Income Exclusion requires qualification through the Bona Fide Residency Test or the Physical Presence Test.
- The Physical Presence Test states that you must be outside the US for at least 330 out of any 365-day period.
- The Bona Fide Residency Test states one full calendar year and a move to a country with the intention of residency for the foreseeable future.
Those living overseas are required to file a Foreign Bank Account Report with the US Treasury as well. Failure to file this results in severe penalties of up to $100,000 per violation.
It is common for people working or living abroad to neglect to file income tax returns for many years. As such, the IRS has created Voluntary Disclosure Programs designed to convince Expats to come forward with voluntary reporting of offshore activities in exchange for lowering the risk of civil penalties.
- Voluntary Disclosure Programs have several benefits for “low-risk” expats taxpayers. Low risk is US citizens, or dual-citizens, who reside overseas, who owe very little or no US taxes.
- Low-risk expats can file 3 years of back tax returns and six years of FBARs without program penalties.
- The definition of low risk usually means less than $1,500 in taxes owed per year and that there were no steps taken to conceal the income.
- This procedure provides no protection criminal prosecution risks.
- Most expats or foreign residents qualify as low risk because the tax amount in the IRS Voluntary Disclosure Program considers the Foreign Earned Income Exclusion and Foreign Tax Credit.
- At risk will be entrepreneurs residing in low tax rate countries, high net worth individuals with untaxed passive income or capital gains, and just about any self-employed person who was not operating through a foreign corporation and is thus subject to self-employment tax. Two groups of Expats are excluded from the IRS Voluntary Disclosure Program:
- If the account is in a bank that is under investigation by the US.
- If the account holder/taxpayer attempts to prevent the release of the banking information from your foreign bank.
A US citizen working and living abroad, who is willing to disclose accounts and assets, should take these actions:
- Discuss the situation with a qualified US tax attorney to evaluate the risks of criminal prosecution.
- Have the attorney prepare US tax returns determining the amounts of tax due for each.
- If a low-risk citizen, join the Voluntary Disclosure Program asap before the banks being used come under attack or there is a disqualification for some other reason.
- Non-low-risk taxpayers may still participate in the Voluntary Disclosure Program, however, they are subjected to substantial taxes and penalties.
Once the tax returns have been prepared the taxpayer will need to continue to do some planning, especially if taxes are owed or there is a risk of prosecution. 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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