U.S. persons residing abroad have special tax considerations both at home and abroad. The complexity and constant change in tax laws and regulations demand a higher level of knowledge and service. It is important to work with a Certified Public Accountant knowledgeable of the unique reporting requirements facing U.S. citizens residing abroad. The penalties are too significant to risk.
We have experience working with U.S. citizens abroad, navigating the complex reporting requirements, including Streamlined and OVDP filings. Here are just a few things you need to be aware of if you are a U.S. citizen residing abroad:
Your U.S. Income Tax Obligation while Living Abroad
As a U.S. citizen you have a legal obligation to file U.S. tax returns each year, reporting your worldwide income, regardless of where you reside. While you have a requirement to file annually, you likely will not owe any additional tax in the U.S. To avoid double taxation, the U.S. has treaties in place with countries around the world. In addition, you may be able to utilize the Foreign Earned Income Exclusion and Foreign Tax Credits. We will coordinate with your local accountant and determine the optimal use of exclusions and credits to achieve maximum tax savings.
Foreign Earned Income Exclusion
If you are a full time resident abroad for a full calendar year, or live there for 330 days out of any consecutive 12-month period, you can exclude up to $100,800 of earned income from U.S. Income Taxation for 2015. If you are married, and both of you earn income and reside abroad, you can also exclude up to another $100,800 of your spouse’s income from taxation. These exclusions can only be claimed by filing a tax return and are not automatic. You can also claim an additional exclusion or deduction for your foreign housing expenses exceeding a standard amount established by the Federal Government. However, if you reside in a high-tax country, it may make more sense to not take the earned income exclusion and use foreign tax credit instead.
Foreign Tax Credits
Your country of residency often has the first right of taxation. Therefore, the U.S. allows credit for foreign taxes paid on the same income to be offset against U.S. taxes. Depending on the difference in tax rates between the U.S. and your resident country, you may owe additional tax in the U.S. or be able to carry tax credits forward for use in future years.
U.S. Tax Treaties with over 60 Countries
The U.S. has tax treaties with over 60 other countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Tax treaties override domestic tax law and reduce or eliminate double taxation of your income by both countries via reciprocal foreign tax credits.
U.S. Social Security, Medicare, and Self-Employment Taxes
If you are an offshore employee of a U.S. corporation, that employer will normally withhold Social Security and Medicare taxes on your W-2 earnings. If you are working for a U.S.-based employer in one of the 20-plus countries with which the U.S. has established a Social Security Totalization Treaty, you may cite a closer connection to the foreign country and participate in that country’s social insurance system, and not have U.S. Social Security and Medicare taxes withheld from your U.S. pay.
If you are a bona fide employee of a foreign employer and are subject to foreign laws governing their social security tax, you are not required to pay U.S. Social Security tax.
If you are self-employed (an independent contractor), you may be subject to Self-Employment tax, in addition to your income tax. We can assist you in making sure you are not paying more tax than you need to.
Foreign Bank Account Report (FBAR)
U.S. citizens and resident aliens that have a financial interest in or signature authority over any foreign financial accounts that in the aggregate exceed $10,000 at any time during the year are required to file the FBAR. This report is required to be filed electronically and is due by June 30th of the following year and no extensions are allowed. The report is filed with the U.S. Treasury. Failure to file this form could result in a $10,000 penalty.
Passive Foreign Investment Companies (PFICs)
Foreign mutual funds, pension funds and other collective type investments, including unit trusts, and open-ended investment companies (OEICs) generally will be classified as PFICs. These investments are subject to ordinary tax rates at the highest individual tax rate, as opposed to lower capital tax rates. In some cases, the total tax on a PFIC investment may rise to well above 50%. In addition, the cost of complying with IRS reporting rules can be significant. If you invest outside the United States, it is important that you seek advice on the tax consequences of your investments. Call us today to review your investments.
Foreign Account Tax Compliance Act (FATCA)
Passed in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts. FATCA requires U.S. taxpayers to report certain foreign financial accounts and offshore assets. FATCA also requires foreign financial institutions to report to the IRS financial accounts held by U.S. taxpayers and foreign entities in which U.S. taxpayers hold a substantial ownership interest. In addition, the HIRE act increases the penalties for failing to file required international information returns and keeps the statute of limitations open indefinitely on a taxpayer’s entire Form 1040 until the required international information returns are filed. If you have foreign financial accounts or other offshore assets, it is important that you are compliant with the FATCA reporting obligations.
REQUIRED INTERNATIONAL INFORMATION RETURNS
Failure to file these forms, if required, could result in a $10,000 penalty per form per year. In addition, the statute of limitations on the taxpayer’s Form 1040 remains open indefinitely until the required international information return(s) is received by the IRS.
Form 8938, Statement of Specified Foreign Financial Assets (FATCA)
Certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $200,000 ($50,000 if residing in the U.S.) are required to file Form 8938, Statement of Specified Foreign Financial Assets. This form is included with your federal tax return.
The IRS provides a table that helps taxpayers determine which assets/accounts are required to be reported on both the FBAR and Form 8938.
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations are responsible for filing Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This form is included with your federal tax return.
Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
U.S. citizens and U.S. residents who have an interest in certain foreign partnerships are responsible for filing Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. This form is included with your federal tax return.
Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities
U.S. citizens and U.S. residents who are the tax owners of a Foreign Disregarded Entity are responsible for filing Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities. This form is included with your federal tax return.
Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing fund
U.S. citizens and U.S. residents who are a direct or indirect shareholder of a PFIC are responsible for filing Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. This form is included with your federal tax return.
Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
U.S. citizens and U.S. residents who have certain transactions with or ownership of foreign trusts or have received large gifts or bequests from certain foreign persons are responsible for filing Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This form is due by the income tax return due date, but is filed separately.
Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner
A foreign trust with a U.S. owner must file Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. This form is due by 15th day of the 3rd month after then end of the trust’s tax year.
Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation
U.S. citizens and U.S. residents who transfer assets to a foreign corporation or partnership are required to report the transfer on Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. This form is included with your federal tax return. Failure to file this form could result in a penalty of 10% of the fair market value of the property at the time of transfer.
Are you behind in your US tax filings? It is important to speak with a CPA before filing your returns. We can help. Call us today for a free consultation.