When you are moving to another country, or planning to move to another country you need to ensure you get all the proper paperwork completed. One key thing is to not forget the expat tax in US, which allows the IRS to tax any U.S. citizen for life or Resident Alien (Green Card Holder) within the last 10 years. Even if you lose your citizenship or renounce it, you can still be taxed for up to 10 years in the US.
What You Are Required to Submit
As always you should be filing your income taxes every year, but when living abroad you will have to file extra forms related to the expat tax in US. Once your worldwide income exceeds a specific threshold based on filing status, it is mandatory for your to file your taxes.
For tax purposes income includes:
– Wages and salary from US and non-US sources
– Rental incomes
In addition to the standard tax forms, as an expat you will be required to submit a FBAR, Foreign Bank Account Report (FinCEN form 114), if your worldwide bank accounts combined balance total exceeds $10,000 (including investments, pensions, and signatory authority accounts.) If your accounts exceed by $10,000 by $1 for only one day, or even one minute, you must file an FBAR. You will be required to submit a Foreign Account Tax Compliance Act (FATCA) IRS Form 8939 if certain financial assets exceed the defined thresholds. FBAR and FATCA are separate and you may need to be required to file either, both, or neither.
Reducing How Much You Owe
There are several different credits and exclusions to take advantage of when filing expat tax in US.
The Foreign Earned income Exclusion (FEIE IRS Form 2555) allows you to exclude a certain amount of income from US taxation, $102,100 for the 2017 tax year which reduces the total earned income that will be taxed by the US. You cannot exclude incomes such as pensions, interest, capital gains, and US-sources incomes through the FEIE. A physical presence test is required to be passed to qualify for the FEIE, which requires you to prove you have been inside a foreign country for 330 of any 365-day tax year.
The Foreign Housing Exclusion can reduce your tax amount by excluding housing expenses such as rent and utilities.
The Foreign Tax Credit (IRS Form 1116) allows you to subtract the tax on an income that is already taxed by a foreign country (if it has not be excluded by the FEIE).
The Child Tax Credit is available if you have dependent US children with US Social Security numbers. Any dependent child you use when applying for a tax credit will be considered US persons and will have tax obligations for life as an adult.
Submission Deadline for Expat Taxes
Expat tax in US has the same submission deadline as all other US citizens. You will receive an automatic two month extension, and any US taxes owed are due by the original date still to avoid penalties or interest. If at any point you move back to the US you will not have the two month extension, even though you may still be eligible for expat tax deductions and exclusion for the tax year abroad.
How Expat Tax affects Social Security
If you retire abroad you will still receive any social security that you are owed and will not be hindered by the expat tax in US. If you live in a country in which you cannot receive benefits, you can still receive any US Social Security payments you missed if you move to a country that allows you to receive them. Your benefits may be taxed, so you should deduct them as income on your returns, especially if you have other income. When they are taxed it is only 85% of your benefits that are be considered taxable. There are totalization agreements with 26 countries to determine whom you will pay Social Security taxes to. You will be able to earn credit in one country and use them for calculations of benefits in another, so that you don’t have to pay twice for one set of benefits.
If Mistakes Are Made
If mistakes are made when you file your expat tax in US you can amend returns using the 1040X form (ASAP to avoid penalties). If you happen to miss some years you will have to submit to the Streamlined Domestic Offshore Procedures to become compliant again.