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Tax for Expats: How an expat tax can affect you

As you may know at this point, living, working, and earning outside of the USA affects your taxation in a variety of ways. Navigating the laws around tax for expats can be very confusing, and it is worrying, as well, to think that you might owe money or have tax obligations to the US government ( www.EsquireGroup.com/tax-for-expats ) that you were not aware of. To help you sleep at night, or at least to help you make future decisions, here is some information on how the expat tax, and its frequent changes, can affect you.

First of all, what exactly is an expat tax?

The USA taxes its citizens on their worldwide income. That means that every US Citizen, even those not living or earning money in the United States, must file a tax return and fill in all the forms and paperwork that are relevant, according to their individual situation and an ever-changing stream of regulations. Taxes (and tax for expats) can have negative consequences for everyone, but they can have benefits as well.

The important thing to remember is to file first and ask questions later.

Without the proper information being given first, nothing can happen. One of the reasons that people have failed to file tax for expats over the past few years is that they do not realize that they are in fact US citizens, or that they have this obligation. Green Card holders, spouses, or people who lived in the US for many years before returning home to their own country still may have filing obligations, even if they never earned a US income. You may not owe any money at all, but the tax for expat penalties come from non-disclosure.

What do you do?

The best thing to do is get good advice. Income tax filing is not an area that should be managed alone. If there is anything about your tax return that makes things even a little bit out of the ordinary, then don’t try to save money by filling out files and forms yourself. Yes, the advice is available online, and so are the appropriate forms, but when it comes to filing tax for expats, you should work with a professional in international taxation, one who keeps abreast of the constant changes to the regulations. In the long run, it won’t save money to go it alone.

You may even get money.

The new laws and recognitions regarding tax for expats is not just for the benefit of Uncle Sam. Not only does filing now save headaches in the long run, but there is also precedence to consider. Once started, it’s easier to keep going, to keep the appropriate forms filled in, and to develop a habit of collecting and keeping paperwork and documentation that may be needed in the future.

There are exclusions and exemptions as well.

Filling out all the appropriate paperwork ensures that you can take advantage of the appropriate Foreign Earned Income Exclusions, the Foreign Bank and Financial Account Reports, and other necessities. This year, the transition tax is in effect, and it impacts those Americans who own small businesses abroad or who gained earnings from US business while living abroad. Earnings can be taxed at up to 15.5 percent if the earnings are held as cash, and at 8 percent otherwise. This tax can be paid in installments over eight years. Of course, not everyone leaves America forever. Most expats still keep ties to family and everything else that they left behind. Not filing tax for expats or keeping up with tax obligations, whether intentionally or not, can affect your right to inherit property in the United States, or to will your money, property, or other assets to family in the United States. Social security, pensions, and medical care may not be something that you think about now, but they may become significant to you and to your dependents in the future.

What are the exemptions that affect you? How much is it necessary to earn before you have to pay tax for expats? These questions lead to more questions that are not easy to answer because, when it comes to taxes for expats ( www.EsquireGroup.com/about ), not everyone is living under the same situation. That is why it is a very good idea not to leave home without an expert in international taxation to watch your back.

Common Myths About Tax for Expats

Misinformation is a big problem in the world of expat tax. Many people who live or work overseas believe different myths and misconceptions about when, how, and how much tax to pay. Today, we want to go through some of the most common myths about tax for expats ( www.EsquireGroup.com/tax-for-expats ) and set the record straight.

Myth #1: You Only File Taxes in Your Current Country

Many people living and working overseas believe that, since they are earning an income in a foreign country, they do not need to file tax for expats with the IRS in the States. This simply isn’t true. In fact, the IRS mandates that almost every American citizen working overseas also files taxes at home. There are, of course, exceptions, but these are so few and far between that you likely need to file taxes at home. The good news is, however, that most people do not need to pay additional tax when filing with the IRS, and an experienced tax firm can help you take advantage of every rule and regulation to keep the additional taxes you pay to a minimum.

Myth #2: Foreign Bosses Mean Paying Foreign Taxes

Some people in the States live at home but work for a foreign employer, and they then think that they don’t need to pay tax for expats in the States since their income is coming from elsewhere. The IRS, however, considers where the employment is taking place as the location of the income, not where the money comes from, so it’s important to file your taxes at home when working in the States (and working overseas, for that matter).

Myth #3: If I’m Below the FEIE, I Don’t Need to File

The Foreign Earned Income Exclusion, for FEIE, is a certain amount of income that is exempt from taxes in the United States for people living and earning an income overseas. The amount changes slightly every year, but in 2018, the amount is $104,100. Many people assume that, if they earn under that amount, they do not need to file tax for expats with the IRS. This is simply not true. In fact, the IRS still requires you to file taxes when your income is below that amount.

Myth #4: US Income for US Taxes

This one is perhaps the most common misconception for people who draw incomes from foreign nations and in the United States, and it makes sense in its own way. But all income must be reported to the IRS, not just income earned in the United States. If you are an expat and you need to file taxes with the IRS, it pays to consult an experienced and professional accounting firm that specializes in tax for expats. With the right guidance, you can ensure that you remain compliant with all rules, regulations, and expectations ( www.EsquireGroup.com/about ), all the while paying the right amount of tax and avoiding any fines or penalties. With the right accounting firm working for you, the many myths and misconceptions about expat taxes won’t affect you or your tax returns.

Why You Need the Offshore Voluntary Disclosure Program

Are you thinking about the offshore voluntary disclosure program? If the program applies to you, then you might want to do more than think about applying. If you don’t, you could be looking at some hefty penalties for failing to disclose your offshore assets.

What is the offshore voluntary disclosure program?

The IRS defines the objective of the offshore voluntary disclosure program as the aim “to bring taxpayers that have used undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, to avoid or evade tax into compliance with United States tax ( www.EsquireGroup.com/Offshore-Voluntary-Disclosure-Program ) and related laws.” The program was created and continues to be upheld because the IRS believes in the value of providing uniform penalty structures for individuals who voluntarily come forward to report previously undisclosed foreign accounts and assets. Taxpayers are given the opportunity to receive predictable and calculable penalties for volunteering their information rather than facing heavier penalties and even jail time. The other bonus is that more cases of undisclosed foreign assets are resolved without examination.

Why should you utilize the offshore voluntary disclosure program?

The offshore voluntary disclosure program can help you become compliant with tax laws without having to face severe penalties and even criminal prosecution. Noncompliance and failing to file FBARs can cause you to face substantial civil penalties, including a $100,000 (or 50 percent of the total balance of the foreign financial account) per violation civil penalty for willfully failing to file an FBAR; a $10,000 penalty (with an additional $10,000 added per month following the 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return) for failing to file Form 8938; a $10,000 (or 35 percent of the gross reportable amount) penalty for failing to file Form 3520; a $10,000 (or 5 percent of the gross value of trust assets) penalty for failing to file Form 3520-A; a $10,000 (with an additional $10,000 per month following the 90 day notification period, up to a maximum of $50,000 per return) penalty for failing to file Form 5471; a $10,000 (with an additional $10,000 per month following the 90 day notification period, up to a maximum of $50,000 per return) penalty for failing to file Form 5472; a penalty of 10 percent of the value of the property transferred for failing to file Form 926; a $10,000 penalty for failure to file Form 8865 (with an additional $10,000 per month following the 90 day notification period); fraud penalty liability up to approximately 75 percent of the unpaid tax; and foreign information return penalties. In addition, the taxpayer faces an increased risk of criminal prosecution for charges relating to tax evasion, filing a false return, failing to file an income tax return ( www.EsquireGroup.com/About ), willfully falsifying or failing to file an FBAR, conspiracy to defraud the government, and conspiracy to commit offense or to defraud the United States. If convicted, you could face prison term of up to ten years and a fine of up to $500,000.

If you choose to avoid being detected by the IRS by using the offshore voluntary disclosure program to amend past returns, you will eliminate the risk of criminal prosecution and will provide yourself the opportunity to face reasonable and calculable penalties to resolve the tax issues and return to a state of compliance.

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.