Friday 24 August 2012

Basic Overview of US Expatriate Tax Requirements

The following is a guest I.J. Zemelman, EA. Tax Operations Director at Taxes for Expats              
Bottom Line:  File Your Taxes Every Year
As a US expatriate working overseas you must file your US federal taxes annually just as you would if you were living in the United States. Why? Because your total world income determines your tax liability – not simply the income you receive in the states. As an American expatriate, though, you have more tax saving options than those with a stateside residence such as housing and subsistence allowance, income exclusions, foreign tax credits, and more. Savvy taxpayers who’ve taken the time to research additional deductions and savings opportunities or who work with a tax professional may have access to even more options. Let’s refer back to the bottom line, though: If you don’t file your taxes you don’t qualify for such deductions and exclusions.

How to qualify for FEIE (Foreign Earned Income Exclusion)?
In order to qualify for the Foreign Earned Income Exclusion on Form 2225 or Form 2555-EZ you only have to be a resident of another country and file your taxes in said country. Married couples who both live overseas may file jointly.

A number of taxpayers are unclear as to what income qualifies for exclusion, and the answer is simple: Only income earned as an employee or contractor. Any monetary gain from dividends, interest, rental income, and other types of investment returns are not excludable from your US tax liability. The last update to the amount US expats were able to claim as exclusion is $92,900 for 2011 and $95,100 for 2012.

Another definition it’s important to take a look at is exactly what constitutes foreign. For IRS taxation purposes, foreign income is viewed as any income received outside of the United States or any US Territory, which include American Samoa, Guam, Micronesia, Northern Mariana Islands, Puerto Rico, and the Republic of Marshall Islands.

Before you can claim FEIE there are certain additional requirements you must meet; you will be required to have lived in a foreign country for a full year, or at least a minimum of 330 days out of a 12 month period.

Information on Foreign Tax Credits?
Tax treaties with the United States ensure that you will be not taxed twice by 2 countries for the same income. In order to ensure you receive your foreign tax credits you must file Form 1116 if you are an individual and Form 1118 if you are a corporation. If you still owe anything to the United States after having applied your credits, the total amount you owe should be very low.

While tax treaties are great for saving international taxpayers money, there are a few important rules and exceptions of which you should be aware:
  • Travelling Restrictions: Some treaties become ineffective if the taxpayer travelled to a country with restrictions such as Cuba. It is important for you to check with the State Department before travelling.
  • Tax Home: If you are involved in a civil unrest you may qualify for an exception which allows you to claim your overseas residence as a tax home.
Note: There are a variety of other rules included in international tax treaties such as those regarding the IRS auditing process: Filing any return begins the 3 year backtracking period to which an IRS agent can perform an audit – including international returns or returns with no taxable income.

Keep in mind that it will not behoove you to try to give false information to the IRS, as quite a few countries including Barbados, Colombia, Dominican Republic, Honduras, Jamaica, México, Trinidad, and many more have active information exchange agreements in place with the US.

If you are living overseas and you are self-employed you will be subject to all US income and SE taxes just as you would if you were living stateside. It is important to be aware that foreign income credits CAN NOT be used to decrease your SE tax liability. 

You will be protected, however, along the lines of Medicare and Social Security contributions. The US has what is known as Totalization Agreements with multiple countries which prevent a taxpayer from having to pay into 2 social insurance systems.

Timing is Critical
American expats who are known to be working overseas or who can prove their income originated overseas will be automatically granted a filing extension to June 15th instead of April 15th.  Both military members and civilians working on overseas assignments qualify for this automatic extension. See our complete list of US Tax Deadlines for expats for more information.

Expats are also able to request a further extension and not be required to file taxes until October 15th.  This extension, however, is only for filing.  If you are an American expatriate and you owe taxes which aren’t paid by June 15th you will most likely be subject to penalties and interest. If you are unable to pay before October you may be able to minimize your penalties by filing Form 2210.

The article is merely an overview of an overwhelming amount of US expat tax information. For additional help, please contact the experts at Taxes for Expats today!

I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887


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