Working overseas is rich with many opportunities – exploring new cultures, learning a new language and more. While financial aspects may be boring to most, understanding the tax environment for US expatriates is a very important consideration that should not be ignored when working and living overseas.
Thankfully, there are many expatriate tax benefits, however there is also additional responsibilities. In this article, I will share some of these insights as a brief introduction to those areas of expatriate taxes that US expatriates should consider.
US Expatriates Are Taxes On Worldwide Income
The U.S. is one of only two countries in the world (Eritrea is the other) that taxes both citizens and residents on their worldwide income. This is very different than the way the rest of the world pays taxes. The takeaway on this consideration is that as long as you’re are a U.S. citizen or considered a U.S. resident, you will have tax filing responsibilities that are not placed on hold while you reside overseas. You will need to continue to file a return as long as your income meets the filing requirements to do so even though you are a US expatriate.
Many US expatriates working overseas are under the misconception that if their income falls under the amount of the Foreign Earned Income Exclusion (Form 2555), that they don’t need to file a U.S. tax return. However, this is not true. In order to claim the Foreign Earned Income Exclusion, a tax return must be filed to actually claim the exclusion.
FBAR and FACTA – What You Don’t Disclose Will Hurt You
The United States (and the IRS by extension) has ramped up its focus on Foreign Bank Account Reporting (FBAR). On July 1, 2013, all FBAR’s must now be filed electronically. This will facilitate and automate the scrutiny of foreign accounts. With implementation of the Foreign Account Tax Compliance Act (FACTA), account information sharing will start between the U.S. and other countries and foreign financial institutions. Now is not the time for US expatriates to be caught with undisclosed accounts.
Anyone with a combined balance of more than $10,000 in a foreign bank account will have to file the FBAR (also known as the TDF 90-22.1) to report foreign accounts. The penalties for non-disclosure are severe. The FBAR and by extension, Form 8938, which expands the disclosure to include other foreign financial assets such as direct ownership of stocks and other specified foreign financial assets is simply a disclosure. There are no additional tax implications beyond what already exists on reporting the income from such assets (i.e. interest income). So while disclosure may be an inconvenience, non-disclosure in a worse case scenario can result in a significant amount of your account being carved out as a penalty.
Pitfalls of Double Taxation
Nobody wants to pay taxes both to the U.S. and any other country at the same time. US expatriates need to review and see if an existing tax treaty (if one exists between the U.S. and the host country) has any special rules or exemptions that pertain to the income being earned in the foreign country that will allow you to exclude such income from taxation in the foreign country.
Consider All Tax Benefits for US Expatriates
While there may not be a tax treaty exemption to exclude your foreign income from foreign taxation, there are a number of other benefits in addition to the foreign earned income exclusion that can benefit US expatriates. One such benefit, is the foreign tax credit (Form 1116) which can be used to reduce U.S. tax liability and reduce double taxation. The foreign tax credit can be used in conjunction with the foreign earned income exclusion, however a thorough analysis should be made to weigh the options of claiming either the foreign earned income exclusion or foreign tax credit or a combination of both.
Final Considerations For US Expatriates
It’s best to learn all you can before making the move. Tax preparation for US expatriates is one of the most complicated areas of the tax code and it is fraught with benefits and exceptions. Take the time to learn how the tax code applies to your situation and what benefits may or may not be available to you in order to minimize your tax liability and tax reporting responsibilities. Some of these additional areas include:
- Social security totalization agreements that address your Social Security in the foreign country
- State income tax reporting responsibilities and residency rules while you are overseas
Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.