Expatriate Tax
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Expatriate Tax Overview

Basically, all worldwide income is subject to U.S. income tax regardless of where you live; and you are subject to the same income tax return filing requirements that apply if you were living in the United States.

You may receive valuable tax saving benefits if you know: 

• The requirements – there are some things you must do to qualify for exclusions and tax credits–and

• How to prepare your tax return.

Here are some examples:

1.      You may exclude from your income part of your foreign earned income.

2.      You exclude or deduct from your income your housing amount (explained below).

3.      You may claim a tax credit for the foreign income taxes that you pay. This is a dollar for dollar write off.

4.      You may deduct foreign taxes as an itemized deduction.

5.       Tax treaties with many foreign countries can cut foreign taxes.

Expat tax filing requirements are generally the same as those for persons living in the United States.

Your age, filing status, gross income, and whether you can be claimed as a dependent by another taxpayer determine if you must file a U.S. Income Tax Return. Your gross income includes all income you receive from foreign sources as well as your U.S. income…even if:

• The income is paid in foreign currency,

• The foreign country imposes an income tax on that income, or

• The income is excludable under the foreign earned income exclusion.

Self-employed persons:  You must file a U.S. income tax return if you had $400 or more of net earnings from self-employment, regardless of your age. This includes your earnings in a foreign country and in the United States.

You must pay self-employment tax on your self-employment income even if it is earned in a foreign country and is excludable as foreign earned income in figuring your income tax.

When to file:   If your tax year is the calendar year, the due date for filing your income tax return is usually April 15 of the following year.

Extensions of time to file.   You are automatically granted an extension to June 15 to file your return and pay any tax due if you are a U.S. citizen or resident, and on the regular due date of your return:

1. You are living and working outside of the United States and Puerto Rico, or

2. You are in military service outside the United States and Puerto Rico.

You must attach a statement to your tax return explaining what situation qualified you for the extension.

Recommendation: You may want to file form 4868 to insure your extension, especially if you may not meet either the bona fide residence test or the physical presence test

Foreign bank and financial accounts:   If you had a bank account, securities account, or other financial account in a foreign country during the tax year, you have to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, if the combined assets in the account(s) are $10,000 or more during the entire year. (There are exceptions for U.S. military)

Estate and gift taxes.   Under certain conditions, you may have to file a federal estate or gift tax return. For more information about estate and gift taxes see our special report on this topic, also you may call or e-mail Ralph.

Income Earned Abroad Explained

Basically, foreign earned income is income received for services you perform in a foreign country. You also may be able to claim a deduction from gross income for your housing costs that are over a base amount. You may qualify for these benefits if you are:

1. A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or

2. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or

3. A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

 Tax home.   Your tax home is the general area of your main place of business, employment, or post of duty where you are permanently or indefinitely engaged to work. You are not considered to have a tax home in a foreign country for any period during which your abode is in the United States. However, being temporarily present in the United States, or maintaining a dwelling there, does not necessarily mean that your abode is in the United States. For details, see Publication 54.

Waiver of time requirements.   You may not have to meet the minimum time requirements for bona fide residence or physical presence if you have to leave the foreign country because war, civil unrest, or similar adverse conditions in the country prevented you from conducting normal business. You must, however, be able to show that you reasonably could have expected to meet the minimum time requirements if the adverse conditions had not occurred. See Publication 54 for more information on foreign countries that individuals have had to leave due to these conditions.

Tax Withholding and Estimated Tax

Generally, you must pay U.S. tax on the income earned abroad in the same way you pay the tax on income earned in the United States. If you are an employee of a U.S. company, your employer probably withholds income tax from your pay. If income tax is not withheld or if not enough tax is withheld, you might have to pay estimated tax.

Withholding tax.   You may be able to have your employer discontinue withholding income tax from all or a part of your wages. You can do this if you expect to qualify for the income exclusions under either the bona fide residence test or the physical presence test. See Publication 54 for information.

Withholding from pension payments.   U.S. payers of benefits from employer deferred compensation plans (such as employer pension, annuity, or profit-sharing plans), individual retirement plans, and commercial annuities generally must withhold income tax from the payments or distributions. Withholding will apply unless you choose exemption from withholding. You cannot choose exemption unless you provide the payer of the benefits with a residence address in the United States or a U.S. possession or unless you certify to the payer that you are not a U.S. citizen or resident alien or someone who left the United States to avoid tax.

For rules that apply to nonperiodic distributions from qualified employer plans and tax-sheltered annuity plans, get Publication 575, Pension and Annuity Income.

Estimated tax.   If you are working abroad for a foreign employer, you may have to pay estimated tax, since foreign employers generally do not withhold U.S. tax from your wages.

Your estimated tax is the total of your estimated income tax and self-employment tax for the year minus your expected withholding for the year.

When you estimate your gross income, do not include the income that you expect to exclude. You can subtract from income your estimated housing deduction in figuring your estimated tax liability. However, if the actual exclusion or deduction is less than you expected, you may be subject to a penalty on the underpayment.

Use Form 1040-ES, Estimated Tax for Individuals, to estimate your tax. The requirements for filing and paying estimated tax are generally the same as those you would follow if you were in the United States.

Foreign Income Taxes

In some cases, foreign income tax you pay can be credited against your U.S. tax liability or deducted in figuring taxable income on your U.S. income tax return. It is usually to your advantage to claim a credit for foreign taxes rather than to deduct them. A credit reduces your U.S. tax liability, and any excess can be carried back and carried forward to other years. A deduction only reduces your taxable income and can be taken only in the current year. You must treat all foreign income taxes in the same way. You generally cannot deduct some foreign income taxes and take a credit for others.

Tax credit.   If you choose to credit foreign taxes against your tax liability, you generally must complete Form 1116, Foreign Tax Credit (Individual, Estate, Trust, or Nonresident Alien Individual), and attach it to your U.S. income tax return. Do not include the foreign taxes paid or accrued as withheld income taxes on Form 1040.

Limit.   Your credit cannot be more than the part of your U.S. income tax liability allocable to your taxable income from sources outside the United States. So, if you have no U.S. income tax liability, or if all your foreign income is excludable, you will not be able to claim a foreign tax credit.

If the foreign taxes you paid or incurred during the year exceed the limit on your credit for the current year, you can carry back the unused foreign taxes as credits to the 2 previous tax years and then carry forward any remaining unused foreign taxes to the next 5 tax years.

Here is a tip: tip: You will not be subject to this limit and may be able to claim the credit without using Form 1116 if the following requirements are met.

1. You are an individual.

2. Your only foreign source income for the tax year is passive income (dividends, interest, royalties, etc.) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).

3. Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return) and are reported on a payee statement.

4. You elect this procedure for the tax year.

Caution:   If you make this election, you cannot carryback or carryover any unused foreign tax to or from this tax year.

Foreign taxes paid on excluded income.   You cannot claim a credit for foreign taxes paid on amounts excluded from gross income under the foreign earned income exclusion or the housing amount exclusion, discussed earlier.

Deduction.   If you choose to deduct all foreign income taxes on your U.S. income tax return, itemize the deduction on Schedule A (Form 1040). You cannot deduct foreign taxes paid on income you exclude from your U.S. income tax return.

More information.   The foreign tax credit and deduction, their limits, and the carryback and carryover provisions are discussed in detail in Publication 514.

Tax Treaty Benefits

U.S. tax treaties or conventions with many foreign countries entitle U.S. residents to certain credits, deductions, exemptions, and reduced foreign tax rates. In this way, you may be able to pay less tax to those countries.

For example, most tax treaties allow U.S. residents to exempt part or all of their income for personal services from the treaty country's income tax if they are in the treaty country for a limited number of days.

Treaties also generally provide U.S. students, teachers, and trainees with special exemptions from the foreign treaty country's income tax. Publication 901 contains detailed information on tax treaties and tells you where you can get copies of them.

You may find answers to some of your questions below:

Why Should I File My Tax Return as Soon as Possible?

There are two advantages to filing as soon as possible:

• Generally, if a taxpayer is due a refund for withholding or estimated taxes paid, it must be claimed within 3 years of the return due date or risk losing the right to it. The same rule applies to a right to claim a tax credit such as the Earned Income Credit (EIC).

• Self-employed persons who do not file a return will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.  

What If I Owe More Than I Can Pay? 
 
Even if a taxpayer doesn't have enough money to pay, returns should be filed to avoid further penalties for failure to file.

The IRS has streamlined its policies to offer alternative account resolutions if a taxpayer cannot pay in full with the return:

• The IRS will help to set up an installment agreement when the situation warrants. Installment payments allow taxpayers to pay the tax debt over time.

• The IRS will consider whether an offer in compromise is an appropriate solution.

The IRS is taking enforcement steps for those who repeatedly choose not to comply with the law. IRS employees will prepare returns when taxpayers do not file. The returns prepared by the IRS might not give credit for deductions and exemptions a taxpayer may be entitled to receive. Bills will be sent to those taxpayers for the tax due, plus penalties and interest.  

People who repeatedly don't comply with the law are subject to additional enforcement measures..  

How Can I Avoid Owing Money on Next Year's Return?

You may not have filed your tax returns because you don't have enough money to pay the tax you owe. You found out after completing your return that your withholding or Estimated Tax payments do not equal your tax liability.  

To help avoid this situation, you can ask your employer to withhold enough tax from your pay. For any income that is not subject to withholding, you must make quarterly payments to cover any amount to be owed.

Changes in financial circumstances could have an impact on taxes. For example, an increase in income, divorce, or selling an asset, may require adjustments to your withholding or estimated payments.

By taking these steps, you will be better able to meet your tax obligations and avoid unhappy surprises.

Will I Go to Jail?

A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.

The IRS helps to get people back into the system as part of its long-term plan to improve voluntary tax compliance. The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated.  

Also, I can help you with other questions such as:

How much will you owe in tax, penalties and interest? 
How can you pay this debt? What are your payment options?
Should you submit an offer in compromise?
Should you file for bankruptcy?
How will this affect an innocent spouse?
Should you set up an installment plan?