Taxes for Expats
Expats or expatriates are individuals who have decided to leave the United States and live, either for a time or permanently, as an immigrant in a foreign nation or return to the country they immigrated to the U.S. from. The reasons people decide to expatriate are varied, but common reasons can include leveraging the lower cost of living for retirement purposes, seeing the world from the diverse and varied perspectives, living the life of a freelance nomad, and for many other reasons. However, despite perceptions to the contrary, becoming an expat or living the expatriate lifestyle is not a valid tax minimization or tax elimination strategy. To the contrary, the failure to satisfy one’s tax obligation as an expat can be punished as tax evasion and additional foreign information reporting creates additional layers of exposure for the ill-informed tax payer.
The experienced tax attorneys and CPAs of The Tax Law Offices of David W. Klasing can provide trusted guidance for an array of taxes for expats and offshore account disclosure issues typically faced. To schedule a confidential consultation over the phone, online, or to meet with us at our Los Angeles or Irvine tax law offices click here or call 800-681-1295.
Why Must U.S. Expats and Americans Living Abroad Pay Taxes?
Many expatriates are surprised to learn that their decision to leave the United States can actually have very little impact on their federal income and other tax filing obligations aside from the ability to claim certain housing and income exclusions along with certain tax credits. However, U.S. persons who move abroad are typically surprised, and hopefully the discovery comes sooner rather than later, that the United States is perhaps the only nation in the world that requires citizen living abroad to file tax returns. Furthermore, under the U.S. Tax Code, citizens are taxed on the basis of their worldwide income regardless of whether they live within the United States or abroad. In other words, U.S. citizens are taxed on the basis of their citizenship and not on the basis of where income was earned. As the only nation that taxes in this fashion, the United States’ approach to this matter often leads to double-taxation of expats though some of this double-taxation may be mitigated through tax treaties and other exemptions, credits and allowances permitted for Americans living abroad.
Considerations to Make When filing Taxes as an Expat
Depending on the nation where an American expat decides to reside, there may be certain tax treaties and other measure in effect to reduce the impact of the double-taxation an expat is likely to face. While the exact provisions and agreements in effect can only be determined after a careful analysis of the expat’s own circumstances, certain exclusions and tax credits are typically available. These include:
- FEIE (Federal Earned Income Tax Exclusion) – Individuals with foreign earned income – income derived from work and not from investments or interest – can typically exclude a significant amount of income for tax purposes. Under FEIE an exclusion of up to $100,800 can be taken for the upcoming 2015 tax year. Expats may also be entitled to a foreign housing exclusion under FEIE.
- Foreign tax credit – Certain foreign taxes paid by the expatriate may be eligible for foreign tax credit. This provision can reduce the burdens of double-taxation, but expatriates should proceed with caution because not all foreign taxes paid are covered by this credit.
Other tax minimization strategies and provisions may apply however their availability is dependent on the nation where the expat resides and an array of other factors.
When to File Taxes as an Expat
A U.S. person that lives abroad is still subject to many of the filing requirements for income, gift, and estate taxes. As noted, income earned by a U.S. person within the United States or a foreign country will still be subject to worldwide taxation.
Ordinarily, U.S. persons must file their tax returns by the April 15 deadline. However, if a taxpayer lives overseas or they are on active military duty outside of the United States, they are given an automatic two-month extension to June 15 to file their return. Under these circumstances, taxpayers will still need to pay taxes that are owed to the IRS on April 15. If these taxes are not paid on April 15, the taxpayer will be assessed a penalty for each day the payment is late.
Taxpayers that are subject to FBAR must use a FinCEN Form 114 provided by the Financial Crimes Enforcement Network. The deadline for filing your FBAR is April 15, but the IRS allows an automatic extension until October 15 for those who miss the deadline. Additionally, if a natural disaster affects your ability to file, you could be offered a longer extension on your FBAR deadline.
There are multiple penalties for missing the FBAR deadline. For instance, if the IRS determines that a taxpayer negligently missed their deadline, they could be assessed penalties.
For people who are subject to FATCA regulations, you must use Form 8938, “Statement of Specified Foreign Financial Assets.” This form should be included with a taxpayer’s annual return. However, if you are not required to file an income tax return for the current year, you will also be exempt from filing Form 8938 even if your foreign financial assets exceeded $50,000 in the previous year.
Usually, the IRS assesses a $10,000 penalty against taxpayers that miss the FATCA deadline. In some cases, penalties for late FATCA filings could reach $50,000 if the taxpayer ignores the notices sent by the IRS.
If a taxpayer refuses to pay their penalties, the IRS may eventually recommend the case to the Department of Justice for prosecution. To avoid this scenario, it is important to communicate with the IRS to negotiate a way to pay down your tax debt.
FBAR, FATCA, and Offshore Disclosure Obligations for Expats
Expats must also comply with a Report of Foreign Bank & Financial Accounts (FBAR) and Foreign Account Tax Compliance Act (FATCA). Both laws requires U.S. persons to disclose the existence of foreign account and foreign assets when the individual holds foreign assets in excess of the reporting threshold. However, these are independent obligations that are satisfied through different means and some accounts may need to be reported as part of both obligations.
A taxpayer is required to adhere to FBAR regulations if the following is true:
- The taxpayer owns a financial interest or has control over one or more financial accounts that are held outside the United States
- The collective value of those foreign financial accounts amounted to more than $10,000 at any point during the calendar year
To meet the requirements for FATCA reporting, a taxpayer must possess a foreign financial account or assets similar to the FBAR regulations. However, the combined value of those assets has to exceed $50,000 to be reportable. There are some occasions where the $50,000 threshold will be increased for a taxpayer.
In particular, FATCA can be exceedingly difficult for expats to comply with and due to FATCA compliance, some foreign banks will not accept U.S. persons as customers. For American expats who are able to open a foreign bank account, they must ensure that they make all required reports should the balance or aggregate account balances exceed the reporting threshold. For FBAR, the reporting threshold is a relatively paltry $10,000. Expats must comply with these reporting obligations or they are likely to face significant penalties.
Tax Professionals Provide Trusted Tax Guidance for Expats
The tax attorneys and CPAs of the Tax Law Offices of David W. Klasing are dedicated to providing comprehensive tax and offshore reporting guidance for taxpayers residing in a foreign nation. Following the passage of FATCA, offshore compliance has become increasingly difficult and many expats have decided to return to the U.S. or to give up their citizenship. If you would like to learn more about taxes for expats our tax lawyers can assist with your goals as an expatriate and troubleshoot any compliance problems you may already face. To schedule a confidential reduced-rate tax consultation with an experienced international tax attorney for expats call us at 800-681-1295 or contact us online today.