Here’s a primer for United States taxpayers residing abroad:
U.S. citizens must file a tax return. Any U.S. citizen who earns income of any kind is obligated to file a U.S. tax return every year, no matter where he or she resides in the world. Many Americans, living abroad and in the U.S., find it unfair that the United States is the only country that requires citizens to file tax returns whether or not they are earning income on U.S. shores. This is a leading reason why some Americans are renouncing their U.S. citizenship.
You can get an extension. If you owe the U.S. government any money, you’re still meant to pay your taxes by the April 15 deadline; however, as an expatriate, you’re eligible for an automatic two-month extension for filing your tax forms, even without requesting it. If two months isn’t enough time to get your forms in order, you may request further extension of up to six months.
Double-taxation may apply to income. If you’ve established residency in a new country, you’ll need to pay income tax in most cases. Even so, you’ll also need to pay US federal tax on your overseas earnings, and may need to pay state tax as well, depending on what property you own in the U.S., unless you qualify for the exemptions listed above.
Some earnings may be exempt. If you meet the requirements for the Foreign Earned Income Exclusion, you may exclude some earnings from your U.S. tax return. For example, if you can demonstrate that you’ve already paid tax on your income in your new country, you’ll qualify for a tax credit for the first $95,000 of your annual income, plus any expenses for foreign housing costs. However, this exclusion is incumbent upon taxpayers providing appropriate evidence of their income tax payment status in the foreign country in which they reside.
However, if you own a business, you are required to pay the self-employment tax portion of your tax bill if you earned $400 or more, even if it would otherwise be excluded as foreign earned income, unless the country you’re living in has an income-tax treaty with the United States. Fortunately, many foreign countries do have such treaties.
You’ll need an accountant and/or tax attorney. Paying taxes while living and owning a business internationally is a complicated issue, to say the least. To make sure that you don’t run afoul of the law or end up making costly mistakes, hire an accounting firm that has experience dealing with expatriate tax issues to help you through the process.
The IRS has recognized that many taxpayers overseas have not timely filed their U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), and is offering a special procedures known as Streamlined Foreign Offshore Procedures to enable delinquent taxpayers to comply with prior unpaid tax obligations and avoid possible IRS enforcement action and those significant penalties related thereto.
In addition to having to meet general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures must: (1) meet the applicable non-residency requirement described below and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR with respect to a foreign financial account, and such failures resulted from non-willful conduct, which is that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
U.S. taxpayers eligible to use the Streamlined Foreign Offshore Procedures must (1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns and (2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs. The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.
A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined below will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties, even if returns properly filed under these procedures are subsequently selected for audit.
However, a taxpayer currently under an audit may not quality for the Streamlined program. If you are an American citizen living abroad and have questions about your taxes and the requirements of FATCA, call the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
