Do you want to retire abroad? Here’s everything you need to know about taxes

American citizens go abroad for many different reasons – a better quality of life in retirement, a career opportunity, to explore, or out of love for a particular person or place – but all Expats share a very important trait: the sense of adventure.

However, moving overseas involves a lot of logistical planning, and financial considerations should always be high on the list, including the requirement that US citizens must still file US taxes after moving overseas.

US Tax Rules for US Citizens Living Abroad

The United States has a citizenship-based tax system. It is the only developed country that has this type of tax system, rather than a system based on residence or territory.

Residence-based tax systems only tax residents of that country, while territory-based systems only tax income and economic activity in that country, whether the income is earned by a resident or not. . The United States, on the other hand, taxes all American citizens, wherever they are in the world.

This raises multiple questions for U.S. citizens abroad: What if they also have to file foreign taxes in their host country? Will a tax treaty protect them from double taxation? What about social contributions?

U.S. Citizens Living Abroad do must file two tax returns if their host country requires them to file, and, although the United States has tax treaties with more than 60 other countries, it does not prevent U.S. citizens abroad from have to produce.

They do, however, contain ways in which U.S. expats can avoid double taxation. The most common way is to claim tax credits when they file their US tax return. in place foreign taxes they have to pay abroad.

The most common way to do this is for expats to file their foreign taxes first, then their US taxes. When they file their US taxes, they complete an additional form (Form 1116) to claim the US foreign tax credit.

Under certain circumstances, U.S. citizens abroad would file U.S. taxes first and then claim offshore tax credits, if their income is considered to be from the United States, for example.

Specific tax treaties allow certain types of income to be exempt from US tax in certain circumstances, most commonly pensions, dividends, or royalty income, depending on the tax treaty. Expatriates who wish to take advantage of a specific tax treaty provision must declare this on Form 8833 when filing their US tax return.

Alternatively, the United States has a provision called the Exclusion of income earned abroad, which can be claimed on IRS Form 2555. In 2021, it allows U.S. citizens abroad to simply exclude the first $108,700 (the exact amount varies each year) of their earned income from U.S. tax. This provision is useful for expatriates who are not eligible to pay foreign tax abroad or who pay foreign taxes at a lower rate than the US rate (and for whom claiming the foreign tax credit would leave them still liable for US tax).

In terms of social security taxes, the United States has treaties called aggregation agreements with a number of countries, which means that US citizens living in one of those countries will only pay social security tax. in the United States or their host country, depending on how long they plan to live abroad. US citizens in other countries who are either self-employed or employed by a US corporation may find themselves at risk of Social Security double taxation.

The countries with which the United States has signed a totalization agreement are Australia, Austria, Belgium, Brazil, Canada, Chile, the Czech RepublicDenmark, Finland, France, Germany, GreeceHungary, Iceland, Ireland, ItalyJapan, Luxembourg, Netherlands, Norway, Poland, PortugalSlovak Republic, Slovenia, South Korea, SpainSweden, Switzerland, the United Kingdom and Uruguay.

U.S. citizens abroad must also declare their registered business interests abroad.

U.S. citizens living abroad are receiving an automatic filing extension until June 15, though any taxes they owe must still be paid by April 15. Those who need more time to file after June 15 can also request an extension until October 15 by completing Form 4868.

FBAR reports

FBAR stands for Foreign Bank Account Report. Filing an FBAR is an additional U.S. reporting requirement for many U.S. citizens who live overseas.

FBAR reporting is for US citizens who have financial accounts registered overseas, whether they live in the United States or abroad. Foreign financial accounts include any type of account with a positive balance, including all bank accounts and most types of individual investment and retirement accounts.

Whether or not U.S. citizens with financial accounts registered overseas need to file an FBAR depends on whether the cumulative total of all balances in all of their qualifying accounts exceeds $10,000 in total at any time during the year. So an American with 10 eligible accounts all containing $1,001, even if only for a few minutes, should file an FBAR to report all of their foreign financial accounts.

Eligible accounts also include any account over which a US citizen has signing authority, such as joint accounts and business accounts, even if the account is not registered in their name.

The requirement to file an FBAR was introduced as part of the Tax Secrecy Act 1970 to help prevent overseas tax avoidance. Somewhat controversially, however, the $10,000 threshold has never been increased in line with inflation.

FBARs are filed with FinCEN, the financial crimes authority, rather than the IRS, which means the penalties for not filing an FBAR are much higher. These start at $10,000 per year for unintentional missed filings or unintentional omissions or errors on the form.

Penalties for intentional and willful FBAR filing evasion can be up to $100,000 per year or half of all foreign account balances. There have been cases of FBAR sanctions running into the millions, including that of former presidential adviser Paul Manafort.

The FBAR form itself is FinCEN Form 114, and it must be filed online by April 15. However, there is an automatic filing extension until October 15 to align the FBAR filing date with the broader US tax return filing date.

FinCEN Form 114 is filed on the FinCEN website through the BSA filing system. It’s not too complex a form to fill out, as long as you have the relevant financial account statements on hand. The information required by the form includes the name and address of the financial institution, the name and number of the account and the maximum account balance in the year for each eligible foreign financial account.

FATCA statement

Since the requirement was introduced, many U.S. citizens living abroad have neglected to file FBARs either because they were unaware of the requirement or because they assumed the IRS had no way of knowing what was in their foreign accounts and therefore would not find them.

This was in fact the case until 2010, when the Foreign Account Tax Compliance Act was enacted. More commonly known as FATCA, the law contained two provisions that affect expatriates.

First, it takes advantage of US global financial hegemony by requiring every foreign bank and investment firm to provide the US Treasury with the personal and account information (including balances) of their account holders who are citizens. Americans. Financial firms that fail to comply must pay a heavy tax on transactions they make in US financial markets.

The result is that almost every financial firm in the world now provides this information to the United States, allowing the IRS to compare it to the information provided on FBARs or to see if an FBAR should have been filed but did not. not been.

The fact that many US citizens with offshore financial accounts that do not file FBARs have yet to be contacted is due to the sheer volume of information the IRS receives. For this reason, so far he has focused on creating examples of wealthy American citizens. However, he is currently developing software to better sort the information he receives.

FATCA also created a new filing requirement for US citizens with foreign financial assets. This means that U.S. citizens living abroad who have total foreign financial assets worth more than $200,000 at any time of the year must report them by filing IRS Form 8938 in as part of their US federal income tax return. (Note that the deposit threshold varies by filing status and foreign residency.) Foreign financial assets include bank and investment accounts, as well as foreign personal retirement accounts and investments in a foreign business.

It is because there is some overlap between FATCA and FBAR reporting requirements that they are often mentioned together, and there is some confusion about them.

Because it has a lower account value threshold, many more US citizens are required to file an FBAR than IRS Form 8938. However, US citizens who meet the minimum account and asset values ​​for both must File both FinCEN Form 114 and IRS Form 8938.

Ask for advice

U.S. citizens living abroad almost always benefit from the advice of a U.S. expatriate tax specialist to ensure they not only achieve and remain compliant, but also file in their best interests.

With additional forms involved (and often currency conversions as well), filing from overseas is more complex than filing in the US.

U.S. citizens who live overseas and didn’t file U.S. tax returns because they didn’t know they had to, may be able to catch up without incurring penalties. under an IRS amnesty program, as long as they do so before the IRS contacts them about it.

This story originally aired on International Living.

Allyson Lindsey is Managing CPA and Partner at Bright!Tax and an expat tax expert. Bright!Tax is a leading provider of tax services for US citizens living abroad.

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