Taxes for Expats – Americans Overseas | IRS Taxes for Expats
Taxes for Expats: The concept of “taxes for expats” and the U.S. is a general phrase that refers to the U.S. taxation of expats by the IRS. U.S. expat taxes can be unnecessarily complicated – and we’re here to help.
Expatriate Definition (What is an Expat?)
An Expatriate or “Expat” is a person moves away from their original country, to reside abroad.
For example, Peter is a U.S. citizen with a case of wanderlust. He has heard wonderful things about relocating to Costa Rica, purchasing some rental properties and learning to surf.
Therefore, Peter packs his belongings and begins his new life in Costa Rica.
How does this impact the U.S. taxation of Peter’s income?
Taxes for Expats (Worldwide Income)
The United States has a bit of a peculiar tax law. Unlike other countries that generally tax citizens and others based on their residence, the U.S. taxes its citizens and residents on their worldwide income.
Here’s how it works:
Let’s continue with Peter. Peter is a U.S. citizen. Therefore, Peter can be taxed by the United States on his worldwide income — whether or not he resides in the United States or abroad, and whether or not the income is considered U.S. sourced or foreign sourced income.
Expat Tax Relief
We have spoken with thousands of expats along the way, and realize there are several rumors and theories floating around about the United States’ ability to tax expats.
Nevertheless, the worldwide taxation laws are still in effect and take priority over other laws in other jurisdictions.
Let’s say Peter also has a bank account in Singapore. Under Singaporean laws, the foreign interest income generated from the bank account accumulates tax-free.
Does that mean that the United States loses the opportunity to tax Peter’s interest income?
No. The United States still gets the opportunity to tax the income.
Expat Tax Exceptions & Exclusions
There are various exceptions, exclusions, and limitations that may limit Peter’s tax liability. Here are few:
Foreign Earned Income Exclusion
If Peter is able to meet the tax home test, along with either (not both) the physical presence test or bona-fide residence test, Peter may be able to exclude upwards of $100,000 foreign earned (not passive) income from his U.S. income calculation.
It is important to note, that the exclusion is not automatic, and that Peter must file a US tax return — and claim the exclusion on Form 2555.
Foreign Tax Credits
If Peter already pays tax on income he earned abroad, he may be able to qualify for a foreign tax credit — so that he’s not paying double tax. As in the prior example, Peter must file a US tax return – and claim the credit (on form 1116).
What About Expat FBAR & FATCA Reporting?
The Internal Revenue Service has a ramped up enforcement involving offshore compliance. Therefore, it is important that Peter remains in compliance; otherwise, the IRS has the opportunity to issue fines and penalties.
Since Peter is still a U.S. citizen, he will still be required to report this foreign assets, accounts, and investments to the U.S. each year annually on various different International informational reporting forms.
FBAR (FinCEN 114)
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
Form 8938 (FATCA)
This form is used to report “Specified Foreign Financial Assets.”
There are four main thresholds for individuals is as follows:.
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
What if I am Out of FBAR Compliance?
If you are out of FBAR compliance, the penalties can be severe. Therefore, you may consider entering the IRS offshore voluntary disclosure/tax amnesty, before it is too late.
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