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Q&A: American Expat Tax Returns

Updated 17 May 2012

Every day we get questions about the expat tax rules and are always amazed how each situation we tackle is always a little different. Here are some quick answers to some common questions that should get you started on understanding the rules and requirements for American expat tax returns:

Do I need to file a US tax return if I live and work abroad? 

Hate to answer a question with a question:  Are you a US citizen, green card holder or permanent resident? 

If your answer is “YES” then you need to file a US tax return.

If your answer is “NO” then you only need to file a US tax return if you have US income from any source.

If it’s that cut and dry, why all the confusion surrounding US tax returns for expats?

The United States is unique in many ways and the tax laws fit right in: every other country requires tax returns based on residency, while in the US the requirement to file are based on citizenship. These rules also apply to dual citizens.

What should I do if I have never filed my US taxes?

The IRS has a six-year statute of limitations if you owe no tax, and ten years if you owe tax, so you should file accordingly, it’s really never too late!  If you owe no tax you will not be subject to any penalties or interest assessments.  If you owe tax, penalties and interest will begin accruing from the due date of the return.

How do I file if I’ll owe taxes?

All US expats are entitled to a FOREIGN EARNED INCOME EXCLUSION that for the 2011 tax year is 92,900 USD. So if your USD converted earnings from employment are less than that (and you have lived offshore for a full year), you will owe no tax.  Also, if you work in a country where you pay income tax, you can further reduce your US tax liability by claiming a FOREIGN TAX CREDIT.

In addition, you are entitled to all the exemptions and deductions that you would normally take, like your spouse, children, medical expenses, mortgage interest, property taxes etc. If that still is not enough, there is a FOREIGN HOUSING EXCLUSION that can be deducted if you have tapped out the full foreign exclusion and your housing and utility costs exceed 14,865 USD.

What does it take to pass the physical presence test?

This can be a little tricky if you move offshore mid-year or you travel back and forth to the States. The rule is that you must be offshore for a minimum of 330 consecutive days, without returning to the US for more than 30 days within any 360-day period. The time can span over two years, as long as it falls within the final due date of the tax return with extension. For example, let’s say you moved offshore on 15 July 2011, you have until 15 October 2012 to meet the 330-day test. If additional time is needed, you may request another 30 days by filing a Form 2350 Extension Request specifically designed for this purpose.

How does a US citizen qualify as a bona fide resident of another country?

Although many expats move under short-term contracts or with the intention of moving back, there is a large percentage of US citizens who pack up and leave “for good”. For example, they sell all their real estate, take on a long-term employment contract, and move all of their personal belongings. Once they live abroad a full calendar year from 1 January through 31 December, they can be considered bona fide residents of their home country and no longer have to meet the physical presence test.

How do the extension provisions work?

As a US citizen out of the country on 15 April, you are automatically granted an extension to file until 15 June, but that extension DOES NOT apply to tax or payments due. So, if you are abroad and owe tax dollars, your payment must still be made by 15 April to avoid penalties and interest assessments by the IRS.

Is it possible to file jointly with a foreign spouse?

Absolutely, but there are some hurdles to jump! First, your spouse must apply for a US ID number by completing a W-7 form. This form must be sent into the IRS with your tax return and a notarized copy of the spouse’s passport, or birth certificate and driver’s license. The identification must be validated in your country of residence - without it your application will be denied and the tax return will be adjusted to remove all exemptions and deductions.

When a US tax return is filed jointly with a foreign spouse, keep in mind that the worldwide income of the spouse must also be reported on the tax return, so if the income exceeds the foreign exclusion or if there is significant investment income, you may be better off filing separately.

Children may be taken as dependents on a separate or joint return. Again, social security numbers are a must!

What’s all the “FBAR” fuss about?

For years, US citizens have been required to report their foreign bank and financial accounts to the IRS once accumulated balances exceeded 10,000 USD. Although there is no tax generated from this form, ignoring your filing responsibilities can generate extensive penalties. At present, there is an amnesty program in place that requires an extensive voluntary disclosure application to limit the assessed penalties to a 5-27.5 percent of the highest balance of all accounts for each year.

US citizens all over the world are “up in arms” about this requirement that they say was never widely publicised. At present. the IRS is accepting late-filed forms that meet a reasonableness test with just cause without penalty. 

For those taxpayers who have filed all Form 1040s timely and as required, FBAR (Foreign Bank Account Reporting Form) late filing penalties are automatically waived.

For those who are high net worth individuals, the Form 8938 is now required in addition to the FBAR.

THE IRS suggests that I use an American accountant to help me with my tax filings, is that really necessary?

Filing your US tax return yourself can be complicated because of your offshore presence. All your information needs to be converted to USD, the correct filing status needs to be determined and all foreign and US information needs to be completed correctly. It’s not an impossible feat, but certainly time-consuming to get it all to “work”. The upside is you can save yourself a few hundred dollars in fees. The downside is that you can be missing out on some valuable deductions that are not clearly obvious using an over-the-counter software package.

If you decide to get some professional help with your US filings, getting an American accountant is a must! There are too many “American” rules, regulations and opportunities that are missed by many foreign accountants who attempt to “do it all” and have had no or little formal training on the subject.

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