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How Can I Understand the Basics of Expatriate Taxation?

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Learn About Expatriation Tax Considerations: What Are the Basics of Expatriate Taxation for Citizens and Green Card Holders?

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Have you ever wondered about the complexities of taxation when living abroad? According to U.S. News & World Report, moving abroad is thrilling, yet it involves navigating visa requirements, finding housing, and understanding tax obligations both in the US and the host country.

This article aims to simplify expatriate taxation for U.S. expats, providing valuable insights into essential tax rules and obligations. Explore the basics of expatriate taxation to ensure you're well-prepared and compliant.

How to Handle Expatriate Taxation for Tax Purposes?

What are the key consideration for expatriate taxation?

What Determines Your Average Annual Net Income Tax?

If you renounce your citizenship or long-term residency, your average annual net income tax must be calculated for the five tax years prior. This includes any federal estate tax or income tax purposes.

Do You Precede the Substantial Presence Test?

Determine whether the expat meets the substantial presence test. Tax would apply if you are considered a resident for that year solely by reason of birth in the US

Are You Subject to Estate Tax on Their Worldwide Assets?

What Happens if You Have $ 2 Million of Assets?

Expat may be subject to estate tax on their worldwide assets if their net worth exceeds $ 2 million. Must file an alien income tax return for the five-year period prior to expatriation.

Further reading: How Do I File My Expat Tax Return Step-by-Step?

What About Eligible Deferred Compensation Plans?

  • Subject to the US tax code, eligible deferred compensation plans may affect your tax bill.
  • The estate tax rate and estate tax exemption are key considerations.

How Does Your Citizenship Affect Your Tax Status?

Do You Hold Citizenship of Another Country?

  • Whether the expat holds citizenship of another country can impact their tax to the US
  • Tax years prior to expatriation determine the applicable federal estate tax.

What If You Live Outside the US?

  • Being born in the US and subject to the US tax system impacts your tax obligations.
  • Assess if you are a citizen or long-term resident subject to estate tax.

What Are the Tax Obligations for US Expats?

Do You Need to File US Taxes While Living Abroad?

Yes, US citizens and long-term residents must file US taxes annually, regardless of where they reside. This applies even if you pay taxes in another country. As a taxpayer, you are subject to tax laws in the US and must comply with the internal revenue code to avoid penalties.

Further reading: What Do I Need to Know About Expat Taxes for American Citizens Abroad?

What Forms Do You Need to File as an Expat?

Expats need to file IRS Form 1040. Depending on your situation, you may also need:

  • Form 2555: To claim the Foreign Earned Income Exclusion (FEIE) and exclude up to $112,000 of foreign earned income.
  • Form 1116: To claim the Foreign Tax Credit (FTC) and reduce US income tax liability by the amount of foreign taxes paid.
  • Form 8938: To report specified foreign financial assets under the Foreign Account Tax Compliance Act (FATCA) if their value exceeds certain thresholds.
  • Form 114: To report foreign bank accounts if their total value exceeds $10,000 at any time during the tax year.

Are There Any Exemptions or Exclusions for Expats?

Yes, expats can benefit from:

  • Foreign Earned Income Exclusion (FEIE): Exclude up to $112,000 of foreign earned income if you pass the Bona Fide Residence Test or the Physical Presence Test.
  • Foreign Housing Exclusion/Deduction: Covers housing costs exceeding a base amount.
  • Tax Treaties: Prevent double taxation and define which country can tax various income types.

How Do Tax Treaties Affect Your Tax Obligations?

Tax treaties can:

  • Prevent Double Taxation: Determine which country can tax certain income types.
  • Offer Tax Relief: Provide tax credits for taxes paid to foreign jurisdictions.
  • Define Tax Rules: Establish provisions for taxing dividends, interest, royalties, and other income types.

How to Navigate Foreign Tax Credits and Deductions?

What Is the Foreign Tax Credit (FTC)?

The FTC mitigates double taxation by allowing you to credit foreign taxes against your US tax liability. This credit is claimed using Form 1116.

How to Calculate and Claim the FTC?

  1. Calculate Foreign Taxes Paid: Determine the amount of taxes paid to the foreign jurisdiction.
  2. Complete Form 1116: Provide detailed information about the foreign taxes paid.
  3. Submit with Form 1040: Attach Form 1116 to your tax return.

Are There Limits to the Foreign Tax Credit?

Yes, the FTC cannot exceed your US tax liability on foreign income. Unused credits can be carried back one year or forward up to ten years.

Can You Deduct Foreign Housing Expenses?

Yes, eligible foreign housing expenses can be deducted through the Foreign Housing Exclusion or Deduction on Form 2555. This includes rent and utilities exceeding a base amount.

What Are the Reporting Requirements for Foreign Assets in Expatriation Tax?

Do You Need to Report Foreign Bank Accounts?

Yes, if the total value of your foreign financial accounts exceeds $10,000 at any time during the year, file a Foreign Bank Account Report (FBAR) using FinCEN Form 114.

What Is the FATCA Requirement?

FATCA requires reporting specified foreign financial assets on Form 8938 if their value exceeds:

  • Single or Married Filing Separately: $200,000 on the last day of the tax year or $300,000 at any time during the year.
  • Married Filing Jointly: $400,000 on the last day of the tax year or $600,000 at any time during the year.

How to Comply with FATCA and FBAR?

  • Maintain Accurate Records: Keep detailed records of foreign financial accounts and assets.
  • Timely Filing: File Form 8938 with your federal tax return by the deadline. File FinCEN Form 114 by April 15 (automatic extension to October 15).
  • Understand Your Tax Obligations: Ensure you meet all reporting requirements to avoid penalties.

What Are the Penalties for Non-Compliance of Tax Rules?

Non-compliance with FBAR and FATCA can result in severe penalties:

  • FBAR Penalties: Up to $10,000 per non-willful violation. For willful violations, penalties can be the greater of $100,000 or 50% of the account balances.
  • FATCA Penalties: $10,000 for failing to file Form 8938, with additional penalties up to $50,000 for continued failure after IRS notification.

How to Benefit from Professional Tax Assistance?

When Should You Hire a Tax Professional?

Hire a tax professional if you have complex income sources, diverse investments, or intricate tax treaty applications. They can also assist with exit tax rules and estate tax obligations.

How to Choose the Right Expat Tax Professional?

Look for professionals with expertise in expatriation and expat tax matters, preferably Enrolled Agents (EAs) or Certified Public Accountants (CPAs) focusing on international tax.

What Services Can a Tax Professional Provide?

  • Tax Planning: Minimizing your tax liability.
  • Tax Filing: Preparing and filing all required forms accurately and on time.
  • Compliance: Ensuring adherence to IRS requirements.
  • Tax Treaty Guidance: Helping you benefit from tax treaties.

How Can Professional Assistance Save You Money?

Professional assistance can save you money by:

  • Avoiding Penalties: Ensuring full compliance with US tax laws.
  • Maximizing Deductions and Credits: Identifying tax-saving opportunities.
  • Efficient Tax Management: Managing complex tax issues.

Key Takeaways

  • Filing Obligation: US citizens must file federal income tax returns, even when living abroad, and expatriation tax may apply.
  • Form 8854: Those who renounce their citizenship must file Form 8854 and certify under penalties of perjury.
  • Covered Expatriates: Individuals with over $2 million of assets are considered covered expatriates and are subject to US tax regime.
  • Capital Gains: Fair market value is used to calculate capital gains for expatriates.
  • Tax Certification: If one fails to certify income tax for the five years before expatriation, they are subject to US estate or gift tax under section 877A.
  • Penalties: An expatriate who fails to certify under penalties of perjury their compliance with US tax obligations for the previous five years will be subject to expatriation tax.

How can Taxfyle help?

Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.

At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.

Legal Disclaimer

Tickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice. You should consult your own legal, tax or accounting advisors before engaging in any transaction. The content on this website is provided “as is;” no representations are made that the content is error-free.

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published

June 28, 2024

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Ralph Carnicer, CPA

Ralph Carnicer, CPA

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