The United States of America. Land of the free and home of the brave.
Not many people may know this, but the USA is one of a few countries in the world that taxes its citizens on their worldwide income. That means that no matter whether you live in Tahiti, France or Thailand, as long as you are an American citizen, you will have to file a US federal tax return if you meet the IRS filing requirements.
Artio Partners, a US tax firm that specializes in international tax preparation, has conducted a survey of Americans planning to move abroad. Most respondents were not aware of US expat tax issues.
These are key tax topics that any American living abroad, or planning to live abroad must know:
1. File your return on time.
US residents have to file a federal return by April 15. However, Americans living abroad get an automatic extension until June 15. It is important to remember that this is an extension to file. Any tax due must be paid by April 15 to avoid any interest.
Form 4868 must be filed by June 15 to request an additional extension until October 15.
2. Learn to save on your taxes.
Provisions are your friend. You need to know how to utilize them, especially if you are living overseas. American expatriates can minimize US tax liability by applying these 3 provisions of IRC 911.
1. First, US taxpayers can claim the foreign earned income exclusion in the amount of $101,300 (YR 2016) if they meet either the physical presence test or bona fide residence test.
2. Second, Americans living abroad can claim the foreign housing exclusion for certain housing expenses if they qualify for the foreign income exclusion.
3. Third, US taxpayers can claim the foreign tax credit for foreign income taxes on a dollar-for-dollar basis.
3. File the FBAR if you have $10,000 or more in foreign financial accounts.
FBAR is the Report of Foreign Bank and Financial Accounts or form FinCEN 114.
American expatriates with a financial interest in or signature authority over one or more foreign financial accounts must file the FBAR if the total highest value of foreign financial accounts equals or exceeds $10,000 at any time during the year. Failure to do so has dire consequences up to a criminal prosecution.
4. Have a foreign pension plan, foreign investment account, foreign trust etc? You need to file this.
Effective July 1, 2014, foreign financial institutions are required to report the accounts of US persons to the IRS. Americans living abroad have to file the FATCA form 8968 if they meet the filing requirements based upon the filing status, threshold and residency. For example, an American expat filing as a single, head of household or married filing separately must submit the FATCA form if the aggregate value of specified foreign financial assets exceeds $200,000 on the last day of the tax year or $300,000 at any time during the year.
5. Know the rules of your state.
Each state in the USA works differently. Most American expatriates are not required to file a state income tax return when they live overseas. However, all states have different domicile requirements. For example, Americans from Virginia might be required to file a state income tax return even if they live overseas until they fully cut ties to the state of VA. This article provides a detailed overview of various state tax requirements for expats. The proper tax planning is recommended before moving overseas.
6. Keep your health insurance.
Americans living abroad are considered to have a minimum essential coverage under the Affordable Care Act if they meet either the physical presence test or bona fide residence test.
7. Report your rental income.
Do you own property in the states? Americans living abroad might decide to rent their US property. If this is the case, then you have to report your rental income and rental expenses on a federal return. You might be required to file a state return too according to the rules of each state. If you don't rent a US property but you pay mortgage interest and real estate taxes in the USA, then you can take an itemized deduction on Schedule A in most of the cases.
8. Keep your social security income.
The United States has tax treaties with 66 countries as well as social security agreements with 25 countries. American expats can receive social security benefits while living abroad. However, the country of residence affects whether the benefits can be obtained.
Have you moved abroad lately and are looking for help with your taxes? Or, are you planning to move overseas? Consult with your tax CPA to get a full in-depth analysis on what you can and cannot do to ensure you get the most out of your tax benefits.