- 1 Do U.S. Citizens Who Work in a Tax-Free Country Pay U.S. Taxes?
- 2 Worldwide Income
- 3 Foreign Earned Income Exclusion
- 4 Treaty Election
- 5 Closer Connection Exception
- 6 International Reporting Requirements
- 7 Late Filing Penalties May be Reduced or Avoided
- 8 Current Year vs Prior Year Non-Compliance
- 9 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 10 Need Help Finding an Experienced Offshore Tax Attorney?
- 11 Golding & Golding: About Our International Tax Law Firm
Do U.S. Citizens Who Work in a Tax-Free Country Pay U.S. Taxes?
The United States is one of the only countries across the globe that taxes U.S. citizens and other US persons such as Permanent Residents and residents who meet the Substantial Presence Test on their worldwide income. That means taxpayers who generate income from overseas are still required to report this income on their US tax returns. With the globalization of the US market, it is not uncommon for U.S. citizens to work abroad in a foreign country. But what happens if a US person lives overseas in a country that does not require individuals to pay personal income tax– are they still required to report this income on their US tax return?
Unfortunately, if a U.S. citizen works abroad in a foreign country, they are still required to report that income on their U.S. tax return — and oftentimes this would result in a U.S. tax liability. That is because, for taxpayers who live in tax-free countries, there would be no foreign tax credits available to offset their U.S. tax liability. Still, some taxpayers may be able to qualify for the Foreign Earned Income Exclusion to avoid being taxed on their entire foreign income. Also, if the taxpayer is a resident for U.S. tax purposes but not a U.S. citizen, they may qualify for a treaty election or the closer connection exception to the substantial presence test (or other exception).
Foreign Earned Income Exclusion
For taxpayers who qualify as having a foreign country as their tax home and meet either the Bona Fide Residence test or Physical Presence Test may qualify to exclude upwards of $120,000 of their income from their U.S. tax return, along with certain housing expenses. If taxpayers are filing jointly then each of them can claim the exclusion if each of them qualifies for the exclusion. Likewise, even if there is no personal income tax requirement in the foreign country, the taxpayer may still qualify for the foreign earned income exclusion. It is important to note that taxpayers who qualify for the exclusion must still file a U.S. tax return along with Form 2555. Just not filing the return because the taxpayer knows they are under the exclusion amount may cause bigger problems since the IRS may not be aware that the taxpayer would otherwise qualify for the foreign earned income exclusion — and if they amass too much tax debt, they may be subject to having their passport revoked or renewal denied.
Some taxpayers who are tax residents of the United States but qualify as foreign persons for residence purposes in conjunction with a tax treaty entered into between the United States and that foreign country may elect to be treated as a foreign person for tax purposes and then they would not be taxed on their worldwide income. Rather, they would only be taxed on their US-sourced income. This typically requires a taxpayer to file a Form 8833 along with a Form 1040-NR.
Closer Connection Exception
Some taxpayers are only subject to U.S. tax on their worldwide income because they and that this substantial presence test. This is typical of taxpayers who may be on a visa such as an H-1B, L1, or B1/B2 and visited the United States for several months, sufficient to meet the Substantial Presence Test. Taxpayers who met the substantial presence test still may be able to avoid being taxed on their worldwide income if they can show they had a closer connection with a foreign country or countries in a tax year. Noting, if the taxpayer already applied for green card status, they generally do not qualify for the closer connection exception.
International Reporting Requirements
In addition to having to file their U.S. taxes to report their worldwide income, US taxpayers who live abroad are also required to report various foreign accounts, assets, and investments on various international information reporting forms such as the FBAR and Form 8938. The failure to file these forms may result in significant fines and penalties although the IRS has developed various amnesty programs to assist taxpayers with safely getting into compliance and minimizing if not avoiding penalties altogether in some instances.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.