We know that you have questions. That is why we have listed below some of the frequently asked questions:
When Do I Have to Report My Foreign Bank Accounts?
When you have more than $10,000 (USD) in foreign bank accounts, the IRS requires you to file Form TD F 90-22.1. The $10,000 requirement applies to the aggregate total from all bank accounts you have outside the U.S. Your obligation to file this document is separate from your obligation to file a U.S. tax return with separate penalties applying for noncompliance.
Do I Have to Pay Social Security and Medicare Taxes?
Unless you work abroad for an American employer, you do not have to pay Social Security or Medicare taxes. If you do have an obligation to pay these taxes and you work in a country that has a bilateral Social Security agreement with the U.S., you may be exempt from these taxes as well.
What is the Foreign Housing Exclusion?
The foreign housing exclusion allows an American who is employed abroad to exclude a portion of housing expenses in the foreign country from taxable income. Each year the IRS determines a “base amount” for the cost of living in various international cities. Your annual housing expenses that exceed the base amount for your city are eligible for the exclusion.
Can I Itemize Deductions if I Exclude My Foreign Earned Income?
Yes. American expatriates can deduct any expense that Americans residing within the U.S. can. This includes any expense you have that is eligible for inclusion on your Schedule A for itemized deductions. The only restrictions are the expenses that directly relate to the foreign income you exclude. However, there are many deductible items that never relate to your foreign income, such as mortgage interest, medical expenses, real estate taxes, personal exemptions and alimony payments you make.
Can I Deduct Moving Expenses when I Relocate to a Foreign Country?
Yes. Provided you move to the foreign country for a job or to look for a new job, you can deduct the reasonable expenses of the relocation. Commonly, these expenses include the cost of transporting your personal effects and household items plus the cost of purchasing an airline ticket.
What is the Foreign Tax Credit?
The IRS allows you to claim either a foreign tax credit or deduction for income taxes you pay in foreign countries. However, if you claim the foreign earned income and housing exclusions, the foreign tax you pay on that income is not eligible for the credit or deduction. The purpose of the benefit is to eliminate you from paying tax twice on the same earnings and income.
I have not filed tax returns for several years. How do I get started?
This situation is actually fairly common. You should begin by contacting an experienced accountant with expertise in expat taxes. He or she will be able to determine your tax situation and guide you on how many years of tax years must be filed for, and what documentation is needed to complete the necessary reports and returns. Certain complications—such as FATCA reporting, the Affordable Care Act, and Foreign Bank Account Reporting (FBAR)—may cause confusion for many expats, but experienced tax preparers can easily manage these issues and walk you through each step of the process.
There is a possibility for penalties due to late filings, but that is dependent on your individual tax situation. It will be affected by circumstances such as employment, filing status, and local tax payments. Generally, FBAR penalties have not been imposed on expats who were unaware of having to file an FBAR. As long as you are ready to file your taxes and submit the FBAR forms for previously missed years, the IRS will likely forgive any penalties that have been incurred.
What is the IRS Streamlined Filing Program? How does it work?
The IRS Streamlined Filing Program was specifically created for American expats who are behind on tax filings. It was implemented on September 1st, 2012, and it allows the filing of only the last three years of expat returns, along with six years of FBAR forms. These forms are all filed with the Department of the Treasury, accompanied by a two-page questionnaire. This allows taxpayers to catch up in their required filings, specifically those the IRS terms “low risk” taxpayers, or those who owe less than $1,500 in taxes per year with no evidence of deliberate tax planning or tax avoidance.
How many years of late tax returns need to be filed?
The amount of years you need to file returns for depends on your individual tax situation. The IRS typically requires the submission of three to six years of tax returns and documentation. As many as eight years may be required for those looking to sponsor a spouse for American citizenship, depending on the requirements of the local embassy. In financial merit situations, such as applying for a loan, three years may be all that is needed. Common situations include: the IRS Streamlined Program (see Question 2); the Offshore Voluntary Disclosure, which requires 6 to 8 years of both Federal Returns and FBARs; and the “Quiet Disclosure”, which requires 3 to 6 years of both Federal Returns and FBARs. However, individual tax situations vary, and the correct amount of years to be filed should be determined by an experienced tax professional.
What are the qualifications I must meet to be considered an American expat?
In order to qualify as an expat in the United States, you must have foreign earned income. In addition, your tax home must be a country other than the U.S. You must also pass the Bona Fide Resident Test, the Physical Presence Test, or be a U.S. resident alien whose citizenship lies in a country with which the United States has an income tax treaty with a non-discrimination article.
- The Bona Fide Resident Test: U.S. citizen is a bona fide resident of a foreign country for an entire, uninterrupted tax year.
- Physical Presence Test: U.S. citizen or resident alien is physically present in a foreign country for at least 330 days during 12 consecutive months.
Is my personal information secure through the process of tax preparation?
Yes. All correspondence is securely transmitted, and documents are safely and professionally kept. Any e-mail attachments with sensitive information are password protected. Each client is provided with a secure, encrypted file online, which can only be accessed using a username and password that you create. The file is open to you at all times for the ease of accessibility to our clients. All information provided to and by each of our clients is of utmost importance, and therefore kept and transmitted as securely and safely as possible.
What information should I provide to you for preparing my U.S. tax return?
The key information that should typically be provided to your accountant includes:
- Documentation of income: rental income, salaries, interest, capital gains, dividends, etc.
- Expense details: rental expenses, investment expenses, local taxes, etc.
- Personal tax situation details: Number of days spent abroad, marital status, dependents, etc.
More or less may be required, depending on your personal situation and the accountant’s needs.
When Must I File My U.S. Tax Return?
The filing deadline of April 15th applies to all taxpayers, irrespective of whether you live and work in the U.S. or abroad. However, expatriates who remain outside of the U.S. on the deadline may receive a 2-month extension to file. Interest will accrue during the 2-month extension period on any tax you owe that remains unpaid. Though, unlike taxpayers who reside within the U.S., a penalty for paying income tax after the deadline does not apply during the 2-month period.
Do I Have to Make Estimated Tax Payments?
The requirements to make estimated income tax payments to the IRS are the same for expatriates as they are for other taxpayers working within the United States. Since many expats are not subject to withholding from a foreign employer, you may be required to make quarterly tax payments throughout the year to avoid penalties. After preparing your return, our office will advise you if this requirement applies to your situation for the following tax year.
What Happens if I Do Not File a Tax Return?
If you fail to file a tax return in any year you have sufficient income, the IRS can impose interest charges on all unpaid tax balances plus various penalties. Separate penalties exist for both your failure to pay tax and for not filing a tax return on time, or not filing it at all. American expatriates also run the risk of losing special tax benefits such as the foreign earned income exclusion if the IRS contacts you before you file the delinquent returns. Plus, you may run into additional problems when you return to the U.S.
What is the Foreign Earned Income Exclusion?
The foreign earned income exclusion is a valuable tax benefit for any American living and working abroad. The federal government allows you to exclude a portion of your earnings abroad from U.S. taxation. The exclusion amount increases each year; for the 2010 tax year, expats are able to reduce taxable income by $91,500. This amount is in addition to the standard deduction and exemptions you may be able to claim.
What is Foreign Earned Income?
Foreign earned income is any income you receive in exchange for your personal services in the foreign country. This includes those who are employees of foreign companies or self-employed. Generally, this income includes all wages, commissions and bonuses you receive. However, your foreign unearned income does not qualify for the exclusion. This includes any alimony you receive while abroad, dividends you receive from foreign brokerage accounts, interest from foreign bank accounts and many other items.
Do I Qualify for the Foreign Earned Income Exclusion?
To qualify for the foreign earned income exclusion, you must have a foreign tax home, earn foreign income and satisfy the physical presence or bona fide resident test.
- Foreign Tax Home: Your tax home is in the country where you are permanently employed and not necessarily in the country where you maintain a family home. For example, if you work for an Italian company in Milan and maintain a residence in the U.S. that you return to periodically throughout the year; your tax home is in Italy.
- Foreign Earned Income: Foreign earned income refers to all compensation you receive for providing services to a foreign employer (or through self-employment) in a foreign country. This excludes the wages you receive as an employee of the U.S. government, pension or annuity payments and Social Security benefits. It does, however, include certain noncash allowances and reimbursements you receive such as cost of living allowances, overseas differentials, family allowances, education reimbursements, and home-leave pay.
- Physical Presence or Bona Fide Resident: You are a bona fide resident if you maintain a residence in the foreign country and reside there for an entire tax year, generally Jan 1 through Dec. 31. It is irrelevant whether you return to the U.S. periodically as long as you intend on returning to the foreign country each time. However, if you are in the foreign country for a temporary assignment, you are not a bona fide resident even when you reside there for a full tax year. If you cannot satisfy these requirements, you may still qualify under the physical presence test. This requires you be physically present in a foreign country for at least 330 days during a 12-month period.