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Many American citizens move to another country for various reasons. Some because they prefer the weather in another country, others because they want to experience a different culture; they’re entrepreneurs with an internet business so they can live anywhere, or they have to move to another country because of their job.
It’s important to note that, just because you move, it doesn’t mean the United States government doesn’t want to know about your foreign income. The IRS wants to know about your income worldwide, and thus requires you to disclose certain foreign financial assets and accounts.
Americans living overseas are no exception to U.S. tax laws. As many expats are aware, the process of filing taxes is complicated, but the potential penalties are higher, even with simple errors.
As a U.S. expat, you generally fall under one of three categories:
1. Working with a paid tax return preparer
2. Filing your tax return on your own
3. Unaware or unwilling to be in the above two categories
If you fall under the first category and work with a domestic tax preparer, you might want to switch to a tax preparer who specializes in preparing tax returns for U.S. expats and is experienced in dealing with taxes in the country you currently live in. The more overall knowledge they have, the better it is for you.
If you fall under the second category and try to do your own tax returns, there is a high chance you’ll inadvertently file a tax form incorrectly, or omit one. Many U.S. expat taxpayers have learned this lesson the hard way – even when they’ve worked with a tax preparer.
If you fall under the third category, you’re going to want to re-think your choice.
Below is a list of common forms used with U.S. expat tax preparation. It’s a good idea to familiarize yourself with them, even if you’re working with a tax preparer. Knowledge is power, and when it comes to taxes, you want to know as much as you can to avoid financial difficulties later because of a simple error.
Common Forms for U.S. Expat Tax Preparation
The Foreign Tax Credit form is used to claim a credit against your American income tax for taxes paid to an overseas country. It applies to unearned income, such as interest, capital gains, rents, and dividends, as well as foreign-earned income, such as salary, self-employment income, and wages.
This form is beneficial for U.S. expats who:
• Live in a country with high income tax rates
• Have children who are eligible to get the additional child tax credit
• Contribute to American retirement plans – solo 401(k)s, IRA’s, SEPs, etc.
Form 2555 and 2555-EZ
These forms calculate your Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion or Deductions. It’s possible to exclude a set amount of earned income, as well as a portion of your housing costs in the other country. However, this exclusion doesn’t apply to self-employment taxes.
This form is most helpful when the income tax rates are higher in the U.S. than the foreign country you live in, or if your total earned income falls below the exclusion threshold.
Form 8938 – Also Known as the Fatca Form
You would use this form if you have to report Specified Foreign Financial Assets and the income you earn from them. It overlaps with the FinCEN 114 Form (FBAR) – described next. However, there are some differences:
• The filing thresholds are higher – they range from $50,000 to $600,000
• They depend on the taxpayer’s marriage status and residency
FBAR Form FinCEN 114
The FBAR form is not part of the tax return, and it has a distinct filing requirement. It applies to U.S. expats who own, have signing authority, or have a beneficial interest in foreign accounts that exceed $10,000 in aggregate value any time throughout the year.
If you own foreign bank accounts, you can disclose this on Part III of Schedule B – even if you’re required to file the FBAR. The FinCEN can’t be mailed and must be e-filed by June 30 – no exceptions.
There are other overseas forms that U.S. expats need for tax preparation, but these are the most common. For other forms, you should get advice from a U.S. Expat tax prep expert, or you can check the IRS website (www.irs.gov/individuals/international-taxpayers/taxpayers-living-abroad).
Income tax is complicated, and it is even more so for U.S. expat tax preparation. If you easily understand how income tax works in the U.S. and overseas, you can try to do it on your own. However, if this information doesn’t come easily, you should seek the help of an expert.
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