subject: The Tax Man Cometh For American Expats [print this page] The U.S. government passed a law in 1916 that required U.S. citizens living abroad to file a U.S. tax return. For many years the law's provisions were largely ignored. America citizens living abroad are now under the microscope and need to file their tax returns.
The Obama administration has a $400 billion hole in the budget that it needs to fill, and believes it can raise 25 percent of that amount by cracking down on offshore tax abuse. The IRS's budget has increased by $128 million and over 800 new IRS agents have been hired to track down people with money overseas and prosecute those who have not been paying taxes.
If you live abroad or are thinking about moving abroad to live, work, or retire, you will need to know:
the income thresholds that will require you to file a U.S. federal tax return;
the tax obligations that you will have if you are self-employed;
foreign bank account reporting requirements and thresholds;
the amount of foreign earned income that is excluded from taxes; and
whether the jurisdiction where you live has entered into a tax treaty with the United States and how (or if) the treaty affects your tax liability.
All U.S. citizens and green card holders are required to file a federal tax return each year if their income is over the minimum threshold. It doesnt matter where the income was earned, and it doesnt matter if taxes are paid locally. The federal thresholds are currently:
single filers with income over $8,950;
married filers filing jointly with income over $17,900; and
married filers filing separately with income over $3,500.
If you are self-employed, you still have to pay self-employment tax (Social Security), which must be paid without regard to the foreign earned income exclusion. Visit the Social Security Administration's Web site (http://www.ssa.gov/international/index.html) to determine how it will work in your circumstance, but generally speaking, you will either need to pay U.S. Social Security taxes or opt out of it. You probably never thought about this, and you may pay a local version of this tax (such as National Insurance in the U.K.). If you have not filed in a few years, this can add up, and you may owe thousands or hundreds of thousands of dollars!
The last but certainly not least important thing you need to know is that if you have more than $10,000 or the equivalent in a foreign bank account, you must report it to the U.S. Treasury in a foreign bank account report (FBAR). To be exact, a U.S. person -- defined as a citizen or resident of the U.S., a domestic partnership, a domestic corporation, or a domestic estate or trust -- must report such amounts each year or face stiff fines and potential jail time.
To report the money, you will need to complete a Form TDF 90-22-1, "Report of Foreign Bank and Financial Accounts," by June 30. Even if you get an extension for your tax return, you will not get an extension of time to file the Form TDF 90-22-1. The IRS offers taxpayers help in completing the form on their Web site.
The news isn't all bad. The U.S. government will not tax the first $91,400 of an expatriate's foreign earned income, and the United States has tax treaties with many countries that prevent expatriates from being subject to double taxation. If the foreign tax rate is lower than the U.S. rate, and your income is greater than the foreign earned income level, then you would only have to pay the difference between the foreign tax and the U.S. tax rate.
The IRS also understands that not everyone has the same tax year end and so gives all permanent residents of foreign countries an automatic extension, until June 15, to file. If you owe money, however, interest will be calculated as of the April 15 deadline, so it pays to file early.
by: David McKeegan
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