Hugo Lesser works at Bright!Tax, a leading US expat tax services provider for Americans living abroad. In this article he shares tips for US citizens abroad on filing their taxes.
For Americans living stateside, tax season has now ended for this year. Expats however get an automatic two month filing extension until June 15th, and can extend it still further until October 15th if they choose to. So with expat tax season very much still afoot, here are our top tax season tips for Americans living abroad.
Tip 1 – Don't hope to hide
The US is the only developed nation that taxes on citizenship rather than residence. This means that US citizens and green card holders have to pay income tax to the IRS on their worldwide income, wherever in the world they live.
It's a matter of public record that there are millions more Americans living abroad who are not currently filing tax returns. Either they don't know that they have to file, or they are hoping that the IRS won't find them.
Besides being able to request tax payer info from most foreign governments, under the FATCA law since 2014 the IRS has been collecting account data of US citizens with accounts at foreign banks. As such, the IRS knows about all income all US expats paid into foreign bank accounts in 2015. If a tax return doesn't match this info, or if there's no return filed, the IRS can simply send them a letter.
The good news is that if you've been living abroad but weren't aware of your US filing obligations, there's a program called the IRS Streamlined Procedure that allows you to start filing without incurring any penalties for previous non-compliance. This is best done before the IRS comes knocking. To qualify, you must file your last three returns and your last six FBARS (more about FBARs to follow), and self-certify that you weren't previously wilfully avoiding tax.
Tip 2 - Know your obligations
The first step when filing is to know with what you have to do and by when.
If you're a US citizen or green card holder and you earn a minimum of $10,000 anywhere in the world you have to file a form 1040.
Expats with overseas assets worth over $200,000 also have to file form 8938 with their return.
Americans who had at least $10,000 in aggregate in one or more foreign financial accounts at any time during the tax year also have to declare their overseas accounts on FinCEN form 114, also known as FBAR (Foreign Bank Account Report). This year's deadline for FBARs is June 30th, however from next year it should be filed with form1040.
Tip 3 - Plan your exclusions
The two main ways of avoiding paying tax on foreign earned income twice (to the IRS and in another country) are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit.
The FEIE allows you to exclude the first $100,800 of your foreign earned income from US tax. Once you claim the FEIE, you must keep claiming it until you let the IRS know that you no longer want to.
The Foreign Tax Credit meanwhile lets you claim a dollar tax credit for every dollar of tax that you've paid in another country on the same foreign earned income.
It's possible to claim both at once if you have more income than the FEIE limit, however if you live in a country with higher income tax rates than in the US, it usually makes more sense to just claim the Foreign Tax Credit, so claiming more credits than the US tax you owe and carrying the excess credits forward for future use.
Tip 4 - Gather your paperwork
Whether you're filing your own return or using an expat tax specialist, it's a good idea to gather all your paperwork before you begin. If you filed last year, you'll just need:
- Last year's return
- Statements showing your 2015 income
- Statements showing any foreign tax paid on your 2015 income
- Foreign account financial statements for 2015 for your FBAR
If you haven't filed previously but you are ready to start, you'll need:
- Income and foreign tax statements for the last three years
- Foreign account financial statements for the last six years (for your FBARs).
Tip 5 - if you're married to a foreigner, file separately
If your spouse isn't an American citizen or green card holder, elect to file as 'married filing separately' on form 1040 to prevent them from having to file a federal return and pay US tax.
Tip 6 - If in doubt, consult an expert
Tax filing when you live abroad is typically more complex than when you live in the US. The penalties for not filing or filing incorrectly are typically steeper for expats too, so if you have any doubts or questions, get in touch with a US expat tax specialist for advice.
For more information please see http://brighttax.com