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US Expat Taxation Living Abroad

Emigrating to another country can be a difficult time for many people. There are a multitude of documents, forms, agreements, and other legal requirements, and sometimes certain ones are forgotten about or not even known to the mover. Often unknown or difficult to understand is the US expat tax (U.S. taxation of expatriates), a process by which the U.S. Internal Revenue Agency (IRS) can continue to tax U.S. citizens or Resident Aliens (Green Card Holders) despite them living in another country for life or up to 10 years following their loss or renunciation of citizenship.

Expat Tax Filing Obligations

Whether or not an expat has earned an income abroad, they should always be filing a US expat tax return, even if they do not owe any taxes. There are certain thresholds, however, to which an expat is required to file an IRS Form 1040 no matter what. Included with an expat’s normal filings, they may also be required to submit a Foreign Bank Account Report (FBAR, FinCEN form 114) if the aggregate balance of all their bank accounts are over $10,000, possibly including any pensions, investments ( https://Esquiregroup.com/US-Expat-Tax ), and any accounts with signature authority. The Foreign Account Tax Compliance Act (FATCA, IRS Form 8938) may also be required to be submitted if certain financial assets exceed filing thresholds.

Reducing Expat Tax Amounts

The Foreign Earned Income Exclusion (FEIE, IRS Form 2555) allows expats to exclude a certain amount of their income from US expat taxation; for the tax year of 2017, that amount is $102,100, which means that amount can be subtracted from their earned income when filing their taxes. However, the FEIE does not exclude other incomes, such as pensions, interest, dividends, capital gains, US-sourced income, etc.; on those, expats are liable for full US tax. Another exclusion that can be used is the Foreign Tax Credit: using IRS Form 1116, an expat can subtract the tax on income that was already taxed by a foreign country. An Expat can only claim a Foreign Tax Credit on income that is also being taxed by the US, so it excludes the amount that has already been removed by the FEIE. In addition to the FEIE and Foreign Tax Credit, expats can also claim the Foreign Housing Exclusion on their rental income to further reduce their tax amounts.

When to File as an Expat

An expat living abroad will have the same tax deadline as a U.S. citizen at home (in the year 2018, April 17th); however, they also receive an automatic two month extension (in the year 2018, June 15th) to file, but any taxes owed are still due by the original deadline. If an expat decides to return to the U.S., they may still be eligible for certain US expat tax deductions and exclusions for the tax year, but without an extension. All amounts must be in U.S. dollars when filing, based on the yearly average currency exchange rates (or specific exchange rates if a taxable transaction has a specific date).

Impact on Social Security

An expat can still collect their Social Security benefits in almost any country in the world; however, they may be taxable up to 85% by the US expat tax ( https://Esquiregroup.com/About ) if they have other sources of income. The US also has agreements with 26 countries to outline which country should receive your Social Security payment, and that allows for credits earned in one country to be usable for benefit calculations in another.

Five Changes to Tax for Expats This Tax Season

Every year, slight changes are made to the American Tax Code and to the rules and regulations that assess taxes. These rules mean subtle or major differences for everyone who files their taxes. Tax for expats, however, is always a little more complicated than domestic taxes ( www.EsquireGroup.com/tax-for-expats ), which is why it is important to keep up with the major changes every tax season. Here are some changes that are important this year, along with how they can affect you.

1. Deadlines

The most important change is not actually a change, but one of the few constants when it comes to tax for expats. That is the date to file your taxes if you are living outside of the United States, which remains June 15. Of course, there are exceptions and changes depending on your own circumstances, but in general, you need to file on or before June 15 to avoid paying fines and interest on any money that you may owe. That’s right; you get a full two months to file your taxes if you live overseas.

2. Changes to Tax Brackets

As per every year, tax brackets have been slightly changed. These changes can be noted on the IRS website. It pays to look at the brackets for your tax for expats so that you can adjust your deduction accordingly. Watch out, though. Deductions have deadlines just like your taxes, so be sure to pay into things before that date or you will be taxed at a higher bracket.

3. The Foreign Earned Income Exclusion (FEIE) Limit

The Foreign Earned Income Exclusion (FEIE) limit for this year is $102,100 USD. This is the amount of money that you can exclude from your taxes when filing, which is helpful for many people who are working regular jobs outside of the United States. Be sure to understand how the FEIE works before filing so that you remain compliant with tax for expats regulations.

4. Healthcare Insurance Coverage

The Affordable Care Act, colloquially known as “Obamacare,” made provisions about healthcare coverage for expats and made tax for expats slightly more complicated. The good news is that if you opted for the Foreign Earned Income Exclusion, either by a physical presence test or residence test, or if you are enrolled in an American expat health plan, you may be exempt. That means you won’t have to be concerned about this tax, and all it takes is filing form #8965 with your tax return. Be aware, however, that if you do not qualify ( www.EsquireGroup.com/about ), you may have to pay a penalty, which is a percentage based on your income, just like tax brackets.

Tax for expats is complicated and sometimes a little messy, which is why many people living outside of the United States turn to dedicated foreign tax professionals to help them stay compliant and pay the right amount. If you are an expat who needs some help with your taxes, be sure to contact a professional tax firm with experience in foreign taxes. They can help ensure that you pay what you owe and no more.

FAQ: Tax for Expats

When it comes to tax for expats, there are a lot of questions. Things can get very complicated very quickly, especially once you factor in unique situations, like dependents who are not US citizens, income made from something other than your salary or hourly wage, investments that you have made, or assets that you have secured. Here are a few answers to common questions about taxes ( www.EsquireGroup.com/tax-for-expats ) for expats that can help you to stay compliant and pay the right amount of tax.

Q: What are Income Tax Treaties and Can I Use Them?

A: For many people living abroad, they can actually pay a reduced income tax rate based on the country in which they reside. Sometimes they can actually not pay income tax to the IRS at all, but it all depends on the country. Tax for expats varies quite widely from country to country.

The United States has specific income tax treaties with many nations around the globe that were created to be mutually beneficial for both nations—and help with tax for expats. These treaties are often to encourage people and experiences to cross borders, like artists and valued skill sets, without making the trip too burdensome to be profitable.

While the IRS website lists the countries with which the US has tax treaties, you will need to consult a tax for expat specialist to understand if that treaty applies to your work, and how much you will save because of that treaty.

Q: I Pay Taxes in the Country I Work, Do I Get Double Taxed?

A: There is a common misconception that the United States Government will tax you your full foreign income regardless of the taxes that you pay to a foreign nation in which you paid your taxes. This is simply not the case. The IRS has rules set out to provide tax credits and deductions based on tax for expats paid abroad so that you are not simply taxed into making no money.

Like tax treaties, these deductions and credits based on tax for expats change from country to country, which is why many people rely on tax experts to help them figure out the best tax strategy for their income level, location, and future plans.

Q: Do I Pay My Taxes in US Dollars?

A: The short answer is yes. You need to pay your American taxes in American dollars, but the actual exchange rate varies since exchange rates change every single second in multiple markets around the world. In general, tax for expats is paid on an annual average for the year, a number that you can easily find on the website for the IRS. If you made money on specific days, then you can use that day’s specific exchange rate as well ( www.EsquireGroup.com/about ), which is also provided on the IRS’ website.

Filing tax for expats is complicated, which is why your best bet for filing your expat tax return is to rely on an experienced, professional accounting firm that specializes in foreign taxes and expats. They can help you file the right amount of tax and stay within the rules laid out by the IRS.

Understanding US Expat Tax

There are many adjustments that need to be made when you take up residence in a new country: learning the language, getting used to the culture, finding a home, and understanding workplace customs. One of the biggest adjustments is planning for your taxes. US expat tax ( https://Esquiregroup.com/US-Expat-Tax ) makes your tax filings a little more complex than they would be at home. Here are some things to consider before you begin earning income in another country.

Paying Taxes in your Country of Residence Doesn't Remove American Tax Obligations

You may be living and working abroad—and paying taxes within that country—but as an American citizen, you are still on the hook for US expat tax. You must claim all income, including salary, rental income, and investment income. Some of this income may come from your current country of residency, some may come from America investments, and some may come from other foreign sources. However, it is all potentially subject to American taxation ( https://Esquiregroup.com/About ), so it's important that all of it gets claimed in addition to claiming in your current country of residence. By being as transparent as possible, you're less likely to run into any trouble with US expat tax.

You Should File in America Every Year

It's important to keep up with your American tax filings by submitting every year. Even if you don't earn any income, having assets in America or having a spouse or partner who is earning income in any country could still have US expat tax implications for you. Making sure that the American government always has a current record of your income is important; it will make certain activities easier, should you choose to move back to the United States.

America has Tax Treaties with more than 40 Countries

Most people don't set out to try to avoid US expat tax entirely, or to operate in an illegal manner. But even the most honest person may get sloppy with the details of their tax filings, leading to serious US expat tax penalties or even legal trouble if even the slightest detail doesn't quite add up. America has tax treaties with more than 40 countries, so if you don't quite tell the IRS everything, odds are they will still find out. It's important to make sure that you're not only being honest, but that you are also cross-referencing and double- and triple-checking every detail so that you don't get into trouble.

Consulting an Expert

As you can see, dealing with US expat tax as you live abroad can be complicated at times. There is much to consider and, unfortunately, a fair bit of room for error. And when it comes to taxes, even the most honest of mistakes can get you into trouble. That's why it's important to always use the services of a US expat tax effort who can work with you to make sure your filings are clean, accurate, honest, and unlikely to cause you trouble or complications in the future.

How You Can Benefit from the Offshore Voluntary Disclosure Program

Are you concerned with the current state of your taxes due to your offshore accounts? The IRS could make the decision to investigate your financial situation at any time. If the thought of that happening makes you sick to your stomach, it might be time to get your situation in order—before it is too late. Withholding information regarding foreign income or assets is a criminal offence, and it’s only a matter of time before this cover-up is discovered. You have the opportunity to come clean with reduced penalties by participating in the Offshore Voluntary Disclosure Program ( www.EsquireGroup.com/Offshore-Voluntary-Disclosure-Program ), made possible by the IRS.

Who Benefits from the Offshore Voluntary Disclosure Program?

Taxpayers that have previously undisclosed foreign accounts and assets have the opportunity to voluntarily come forward and report their existence with the Offshore Voluntary Disclosure Program. By doing so, these taxpayers have the chance to willingly resolve the issues in their previous income tax reports before they run the risk of coming under official investigation by the IRS. By partaking in this program, these taxpayers who were previously evading the IRS can prove to the government that they ought to be trusted with their yearly income tax declarations moving forward. This program allows taxpayers the opportunity to file up to eight years’ worth of tax returns and Foreign Bank and Financial Accounts (FBARs). Financial assets, such as bank accounts, mutual funds, trust funds, and other financial ( www.EsquireGroup.com/About ) interests, are included within these FBARs. The taxpayers who choose to voluntarily disclose their offshore accounts and assets will avoid prosecution and limit their exposure to civil penalties by partaking in the Offshore Voluntary Disclosure Program. This program not only benefits taxpayers; it also allows the IRS the opportunity to resolve a number of cases without conducting examinations.

How does the Offshore Voluntary Disclosure Program Work?

In order to be eligible to participate in the Offshore Voluntary Disclosure Program, a taxpayer must have invested legal source funds in their previously undisclosed assets. If any of the funds or assets being disclosed are found to be derived from criminal activity, you will be unable to participate in the program. If you have waited too long and are currently under civil examination or criminal investigation by the IRS, you are also ineligible to participate in the program. It is important that everyone who takes part in the program does so voluntarily—not because they fear that the IRS is closing in on them.

The Offshore Voluntary Disclosure Program was not designed to be a way out for those who are facing the threat of persecution. Instead, this program aims to assist those who acted intentionally when they chose to keep their offshore funds and accounts a secret from the U.S. government, but who have since decided to make things right. The decision must be of your own accord, ensuring that you can be trusted to disclose all of your accounts in the future. By admitting your past mistakes before the IRS is forced to take action, you will save yourself money and will avoid potential jail time. Once you have paid back your taxes owing, including any interest and penalties that have been added to those previously undeclared taxes, you can move on without the threat of criminal investigation or imprisonment. As this is a voluntary program, anyone who participates cannot be criminally prosecuted as a result of what is uncovered, and any non-compliance older than eight years will be forgiven.