Understanding Tax Laws for U.S. Expatriates
Emigrating to another country can be a difficult time for many people. There are a multitude of documents, forms, agreements, and other legal requirements, and sometimes certain ones are forgotten about or not even known to the mover. Often unknown or difficult to understand is the US expat tax (U.S. taxation of expatriates), a process by which the U.S. Internal Revenue Agency (IRS) can continue to tax U.S. citizens or Resident Aliens (Green Card Holders) despite them living in another country for life or up to 10 years following their loss or renunciation of citizenship.
Expat Tax Filing Obligations
Whether or not an expat has earned an income abroad, they should always be filing a US expat tax return, even if they do not owe any taxes. There are certain thresholds, however, to which an expat is required to file an IRS Form 1040 no matter what. Included with an expat’s normal filings, they may also be required to submit a Foreign Bank Account Report (FBAR, FinCEN form 114) if the aggregate balance of all their bank accounts are over $10,000, possibly including any pensions, investments, and any accounts with signature authority. The Foreign Account Tax Compliance Act (FATCA, IRS Form 8938) may also be required to be submitted if certain financial assets exceed filing thresholds.
Reducing Expat Tax Amounts
The Foreign Earned Income Exclusion (FEIE, IRS Form 2555) allows expats to exclude a certain amount of their income from US expat taxation; for the tax year of 2017, that amount is $102,100, which means that amount can be subtracted from their earned income when filing their taxes. However, the FEIE does not exclude other incomes, such as pensions, interest, dividends, capital gains, US-sourced income, etc.; on those, expats are liable for full US tax. Another exclusion that can be used is the Foreign Tax Credit: using IRS Form 1116, an expat can subtract the tax on income that was already taxed by a foreign country. An Expat can only claim a Foreign Tax Credit on income that is also being taxed by the US, so it excludes the amount that has already been removed by the FEIE. In addition to the FEIE and Foreign Tax Credit, expats can also claim the Foreign Housing Exclusion on their rental income to further reduce their tax amounts.
When to File as an Expat
An expat living abroad will have the same tax deadline as a U.S. citizen at home (in the year 2018, April 17th); however, they also receive an automatic two month extension (in the year 2018, June 15th) to file, but any taxes owed are still due by the original deadline. If an expat decides to return to the U.S., they may still be eligible for certain US expat tax deductions and exclusions for the tax year, but without an extension. All amounts must be in U.S. dollars when filing, based on the yearly average currency exchange rates (or specific exchange rates if a taxable transaction has a specific date).
Impact on Social Security
An expat can still collect their Social Security benefits in almost any country in the world; however, they may be taxable up to 85% by the US expat tax if they have other sources of income. The US also has agreements with 26 countries to outline which country should receive your Social Security payment, and that allows for credits earned in one country to be usable for benefit calculations in another.
Esquire Group, a boutique international tax advisory firm specializing in tax consulting, tax planning and compliance and helping corporate and individual taxpayers with Offshore Voluntary Disclosure Program, asset protection, and US expat taxes. To learn more about us, visit https://Esquiregroup.com/About.