You’ve made the life-changing decision to move to another country and you couldn’t be more excited at the adventure that lies ahead.
But then you try to get your head around U.S. expat taxes and wonder whether it’s all going to be worth it.
With so many dos and don’ts, cans and cannots, musts and must nots, it can be incredibly confusing as to what taxes you’ll need to pay and what benefits you’re entitled to while you’re living and/or working abroad.
So to help put your mind ease, we’ve put together this handy expat tax guide that’ll dispel some common myths and explain just what you need to be aware of when you move to your new country.
1. U.S. Expat Taxes Apply to All U.S Citizens and GC Holders
This is one of the areas that sparks most confusion because many expats believe that, when they move to another country, they don’t have to pay U.S. taxes. But that’s where they’re wrong.
Even if you do take up residence in a foreign country, you still need to pay taxes to your homeland. That’s because, the U.S. is one of just two countries (the other’s Eritrea) that taxes its citizens regardless of where they’re living. However, there are talks to potentially eliminate this double taxation.
2. You Have to File a U.S. Tax Return Even if You Don’t Owe U.S. Taxes
Another incredibly gray area is the fact that, even if you’re below the thresholds for U.S. taxes, you still need to file a tax return on an annual basis.
To try and prevent U.S. citizens from being hit with double taxation on income they’ve earned while they’re living abroad (i.e. tax imposed by the country of residence and the U.S.), the U.S. tax code has conditions that can eliminate or reduce your obligation to pay these taxes. For example, the Foreign Earned Income Exclusion (FEIE) enables expats to exclude a particular income amount earned abroad (for 2015 this is $100,800). Furthermore, expats are often allowed to use the taxes they’ve paid in a foreign country as a credit against this obligation.
There are a number of ways you can qualify for FIFE. Firstly, there’s the physical presence test where you must have spent at least 330 full days over 12 consecutive months in your new country. Or you can gain bona-fide residency, where you become a “resident” of a foreign country. Self-employment also qualifies, but there are some different requirements for self-employment tax.
However, even if your provisions remove your obligation to pay U.S. taxes, they don’t remove your obligation to file an income tax return in the U.S. Why? Because in order to claim foreign tax credit or FEIE, you have to file some forms along with your tax return. Sometimes, if you file this too late, you could be barred from making any claims or you may have to pay a penalty.
3. You Have to Tell the IRS About Money in Your Foreign Bank Account, Even if It’s Not over $100,000
The Foreign Bank and Financial Account Report (FBAR) is submitted to the Treasury Department on an annual basis. A U.S. account holder (entity or person) with a signature authority or financial interest in at least one foreign financial account that has an accumulative total of $10,000 or more must file this form.
When collating all your account balances, you’ll need to include pension, investment, savings, checking, and mutual fund accounts.
4. You Still Need to Pay U.S. Taxes on Your Pension or Savings Plan
In a lot of foreign countries, you’re allowed to contribute to a savings or pension plan while enjoying tax deferral until payments are made from your plan when you retire. However, this has no effect on your U.S. taxes.
In many cases, the U.S. can tax both the earnings and employer contributions in the existing tax year, which may lead to you paying actual cash taxes as your U.S. tax obligation may not be reduced by your foreign tax credits.
5. You Can File Your Late Taxes Without Incurring Penalties
Our final point is a slightly more positive one, as many expats are unaware that late filers are currently being offered a number of exemptions through IRS tax amnesty programs. Under these streamlined procedures, late taxpayers can now admit to their tardiness without being hit with hefty penalties. You’re just required to file six years of FBARs and three years of tax returns.
Hopefully, the above has shed some light on what’s involved in U.S. expat taxes. However, for 100% clarity and to be confident you’re filing what you should when you should, it’s highly recommended to speak to a tax expert who specializes in expatriate services.