U.S. Taxes For Expatriates – Pitfalls And Traps

To ensure a smooth tax-filing process be well informed. Having residency in a foreign country without exploring tax ramifications could mean paying more than expected to the U.S. government or home state with possible penalties and interest.

This article was written exclusively for Expat Network by American Expat Tax

Some important considerations include…

 

Foreign earned income amount. A substantial amount of earned foreign income is deductible from U.S. taxes.

The IRS announced (Aug 24th) a new law allowing US citizens and resident aliens, contractors or employees supporting the US Forces in combat zones, to qualify for the Foreign Earned Income Exclusion (FEIE).  Changing the tax home requirement for eligible taxpayers lets them claim FEIE even if their “abode or home” is in the US.

Prior, citizens maintaining an “abode” in the United States could not claim FEIE.

Most US citizens living and working overseas qualify for the FEIE as they meet the bona-fide residency test. Therefore, the first $103,900 (2018 exclusion cap) of income earned in the foreign jurisdiction is excluded from US taxation. For 2019, the FEIE is $105,900.

 

Host country. Many countries have tax treaties with the United States, which dictates the filing of U.S. taxes.

The United States has tax treaties with many foreign countries where residents of foreign countries are taxed at a reduced rate or exempt from U.S. taxes. These reduced rates and exemptions vary among countries and specific items of income. Under these treaties, residents or citizens of the United States are taxed at a reduced rate or exempt from foreign taxes.

 

State most recently lived in. Some states don’t have income taxes; others make it difficult to sever ties with that state.

Many of the individual states of the United States tax income sourced in their state.

Explore each state’s regulations to see which provision or combination of tax treaty provisions is allowed and which combination of remedies provide the best outcome when considering all taxing jurisdictions.

 

Rental income and dividends/interest from assets in the U.S. Taxes are payed exactly as if living in the U.S.

 

Self-employment. Taxes are paid on self-employment income even if excludable as foreign earned income on your income taxes.

The United States has social security agreements with foreign countries to coordinate social security coverage and taxation of workers employed for part or all of their working careers in those countries.  These agreements are commonly referred to as Totalization Agreements.  Under these agreements, dual coverage and dual contributions (taxes) for the same work are eliminated ensuring social security taxes (including self-employment tax) are paid only to one country.

 

Holdings in a foreign bank account.

A U.S. “person” is required to complete and file a report of foreign bank and financial account (FBARs) when having:

  • Financial interest in or signature authority over at least 1 financial account located in another country AND
  • The value of foreign financial accounts exceeded $10,000 at any time during the calendar year the accounts are to be reported.

Complete and file Form 8938, Statement of Specified Foreign Financial Assets if specified foreign financial assets owned have a total value exceeding an applicable threshold amount. This varies based upon living in the U.S., marriage status, or filing a joint tax return. Specified foreign financial assets include:

  • Financial account maintained by a foreign financial institution
  • Securities, stock, or interest in a foreign entity and any financial tool or contract with a counterparty or issuer not from the United States (to the extent held for investment)

FATCA requires non-U.S. banks to report American citizens’ accounts worth over $50,000 or are subjected to 30% withholding penalties and possible exclusion from U.S. markets.

 

Whether it’s filing a current year US expat tax return, preparing years of unfiled US tax returns or resolving an IRS problem, we assist our satisfied clients with every aspect of their financial lives while living abroad. Please email us today.