TAX ISSUES Expat Tax: Common Myths About US Tax Filing Requirements In general, US citizens and permanent resident visa holders (expatriates) are required to file a US income tax return, FBAR reports and possibly state income tax returns if they meet the filing requirements. There is common misinformation regarding these US filing requirements so we are identifying the common myths regarding expats and US tax filings. 1. Individuals living outside of the US and filing tax returns with the foreign government are not obligated to file annual US tax returns. This is incorrect. The US requires its citizens and permanent residents to file annual tax returns irrespective of where they live or earn income as long as they meet the filing requirements. This is true for expats that have never lived in the US or moved from the US when they were young. 2. My foreign accountant, foreign financial advisor, or other trusted advisor has specifically advised me that a US tax return was not required, or that only certain income was subject to reporting in the US. This may be correct if you do not meet the filing requirements. However, it is best to consult with an advisor specialising in US reporting requirements. 3. Since my foreign sourced income is below the Foreign Earned Income Exclusion (FEIE), a US tax return does not need to be filed. This is incorrect. The FEIE allows expats working aboard to exclude up to $99,200 in gross income from their 2014 ($100,800 for 2015) taxes but a US tax return must be filed to claim this benefit. 4. Only my US Sourced Income needs to be reported on my US tax return. This is incorrect. The IRS taxes expats on their worldwide income. So regardless of where you work, you must report your income as if you worked within the US. However, certain rules and benefits are available to expats, such as the FEIE and Foreign Tax Credit (FTC). US citizens and residents are taxed on their worldwide income. To minimise double taxation, the US provides expats with benefits such as the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). For 2014, the FEIE allows US citizens and residents working abroad to exclude up to $99,200 from their taxable income (note that the FEIE will increase to $100,800 in 2015). Expats can exclude only earned income, which includes salary, wages, bonuses, and in many cases self-employment income. Social Security, investment income, and pension income typically do not qualify for the exclusion. The FTC would allow your resident country income taxes to offset your US tax liability and often results in no US tax liability as long as the foreign income tax rates 14
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are higher than the US income tax rates. The rules are complex and tests must be met before you can claim the exclusion, and you have to take into consideration which taxes and income qualify for the FTC. Form 2555, Foreign Earned Income, is used to calculate your FEIE and your housing exclusion or deduction. In order to qualify, you must meet the tax home test and meet either the bona fide residence test or meet the physical presence test. The Form inquires about aspects of your stay abroad, such as your visa status, to help determine the nature and length of your stay for purposes of determining bona fide resident status. For instance, if you were a permanent resident of the other country there is no issue, but if you only held a year-by-year visa, or visa for a particular purpose, the chances of being considered a bona fide resident of that country can be reduced. If that is the case, you may want to look to the physical presence test instead. This test requires that your principal place of work is outside of the US for 330 days within a 12-month period, which does not necessarily need to be a calendar year. Form 1116, Foreign Tax Credit, is used to calculate your FTC available to offset your US tax liability. This form can be used in combination with the Form 2555 or exclusively. In order to claim the FTC, the taxes must be paid or accrued by the taxpayer during the tax year. The FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) is required to be filed if you have a financial interest in, or signature authority over, a foreign financial accounts that, in the aggregate, exceed $10,000 USD at any time during the calendar year. The IRS Form 8938, Statement of Specified Foreign Financial Assets may be required in addition to the Form 114. A Form 8938 is required to be filed if you have an interest in specified foreign financial assets and the value of those assets is more than the following applicable 2014 reporting thresholds:
“There is common misinformation regarding these US filing requirements so we are identifying the common myths regarding expats and US tax filings.” Non US based Pension Plans and Deferred Compensation Plans may need to be reported on the FBAR and Form 8938 if the balance held in your name meets the above filing thresholds. If you have now realised that you are delinquent on your US income tax returns or FBAR reports, there are ways to get current with your filing obligations. The IRS currently has several disclosure programmes available. The most common programme is the Streamlined Filing Compliance Procedure, which requires the filing of 3 years of US tax returns and 6 years of FBAR filings. The Streamlined Program is a vehicle for Americans living abroad who have honestly overlooked their filing obligations and not under audit from the IRS. If you have correctly filed your US income tax returns but were not aware of your FBAR filing
Taxpayers living in the US – Filing Status
On 12/31/2014
Anytime in 2014
Unmarried
$50,000
$75,000
Married Filing Jointly
$100,000
$150,000
Married Filing Separately
$50,000
$75,000
Taxpayers living abroad – Filing Status
On 12/31/2014
Anytime in 2014
Unmarried
$200,000
$300,000
Married Filing Jointly
$400,000
$600,000
Married Filing Separately
$200,000
$300,000