What to Know About U.S. Expat Taxes
Reporting Your Worldwide Income
If you are an American citizen, or U.S. Green cardholder, you are required to report your income on a “worldwide” basis to the Internal Revenue Service (IRS).
That means you are required to report every dollar of income earned in a given year, no matter whether it was earned in or outside of the United States.
Reporting Your Foreign Assets
If you are an American expat, and still maintain your American citizenship or U.S. Green card, you may be required to report your foreign assets to the U.S. government on an annual basis. There are many potential reporting requirements, but the following are the most common:
The Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938, Statement of Specified Foreign Financial Assets.
The FBAR form is required for U.S. taxpayers who hold foreign financial accounts with an aggregate max value of $10,000 or more in a given tax year. If required to file this form, the U.S. taxpayer must report specific details about all such foreign financial accounts such as the account number, bank name and address, max value of the account in the given year, etc.
Form 8938 is required to be reported by U.S. taxpayers who have an aggregate max value of certain foreign financial assets in a given year over specified threshold. The nature of the reporting required by Form 8938 is similar in nature to that of the FBAR discussed above, but requires additional detail and reporting. The thresholds to report this form vary depending on whether the U.S. taxpayer resides in the U.S. or in a foreign country. You can find the reporting threshold on the IRS website here.
You Are Entitled To An Exclusion For Foreign Earned Income
U.S. taxpayers living and earning income abroad may be allowed to “exclude” certain foreign income earned in a given year. This exclusion is better known as the “Foreign Earned Income Exclusion” (FEIE). It essentially allows U.S. taxpayers who maintain a tax home in a foreign country, and are either a “bona fide resident” of a foreign country OR are outside of the U.S. for more than 330 days in a given year. The max exclusion for 2020 is $107,500.
Additionally, Form 2555 will have to be prepared and filed with your return to claim the exclusion.
See the exclusion amounts and a more detailed explanation of the FEIE here.
You May Be Entitled to a Credit on Foreign Tax Paid
U.S. taxpayers who pay income tax to foreign governments may be entitled to a credit for said amounts of foreign income tax paid. The calculation of this credit is complex and is subject to numerous limitations.
However, if you do pay foreign tax to a government, make sure to let your accountant or attorney know so they can help you take advantage of this potential credit against your U.S. tax liability.
You May Have to Report Your Ownership of Foreign Businesses
U.S. taxpayers may have to report the activity of a foreign company depending on their overall relationships and level of ownership of the foreign company. Some of the most notable forms that may be required to be filed are Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
Form 5471 is required to be reported by U.S. taxpayers who are officers, directors, or shareholders in certain foreign corporations. There are five categories of filers, each category of which has its own certain reporting requirements.
Form 8865 is required to report the activity of controlled foreign partnerships, transfers to foreign partnerships, or acquisitions, dispositions, and changes in foreign partnership interests. Similar to Form 5471, Form 8865 has various categories of filers, each of which has its own specific set of reporting requirements.
You Might Be Entitled to Benefit Under a Double Tax Treaty
The United States has entered a large network of tax treaties with foreign countries to help lower the incidence of double taxation on income earned between the two countries. Generally, these treaties dictate how income and expenses are treated, reported, and taxed by and between the two countries.
A U.S. expat who maintains their citizenship or U.S. Green card may be able to take advantage of a treaty by reporting themself as a “non-resident” of the U.S. If properly utilized, the U.S. expat may only have to report and pay tax on income earned within and sourced to the United States.
Generally, the protections of a tax treaty utilized in a given year must be reported on Form 8833, Treaty-Based Return Position Disclosure. This form is required to report the treaty benefits claimed and how they are accounted for on your US tax filing for the year.
If You Failed to Properly Report Your Foreign Income and Assets in Previous Years, You Have Options
It is not uncommon to find that many expats do not understand the complex reporting requirements of the U.S. tax system. This in turn leads to errors on returns filed by expats and their accountants. If this is the case, the expat has options to get back in compliance with the IRS, with small to minimal penalties.
One such program is the IRS’s Streamlined Filing Compliance Procedures. The purpose of this program is to allow U.S. taxpayers, who failed to properly report foreign earned income and assets in prior years due to “non-wilfullness”, to file a number of years of back taxes and certain foreign asset information reporting forms known informally as FBARs. Specifically, the program requires the U.S. taxpayer to properly amend and file the three previous years of tax returns and six years of FBARs.
In addition, the specific streamline program chosen will either require a filing of Form 14653 or Form 14654 to report a statement of “non-wilfullness” detailing the mistakes that were made leading to their ultimate non-compliance and need for disclosure through the streamline filing compliance procedures.
Contact Our Orange County Expat Tax Lawyer
The expatriate tax attorneys & CPAs at Evolution Tax and Legal have the experience to provide comprehensive tax guidance and representation for both U.S. and non-U.S. citizens. We are available to walk you through the tax process for expats, and assist you with any hurdles you might face.
We are conveniently located in Irvine, CA. To schedule a free consultation with an expat tax attorney in Orange County, give us a call at (949) 229-6015 or contact us online.