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Expat Briefing Editorial Team
16 March, 2016
With the United States authorities having recently issued new guidance on selected expat tax issues, in this feature we provide a reminder of the tax rules facing expat Americans.
Tax By Nationality
Unlike citizens of many other countries, Americans never really escape the attentions of the Internal Revenue Service because the United States taxes its citizens on the basis of their nationality and not on the basis of their residence. There is an income tax concession available during non-residence, but all other respects the international tax situation of an individual citizen is about the same whether they are in or out of the US.
Foreign Income and Housing Exclusions
US expatriates who meet the Physical Presence Test or meet the Bona Fide Resident Test (see below) may be able to take advantage of the Foreign Earned Income Exclusion and or the Foreign Housing Exclusion. This exclusion entitles US expats to exclude for US income tax purposes a certain amount of foreign earnings that is adjusted annually for inflation.
In addition, US expats can exclude or deduct certain foreign housing amounts, which are based on the total of your housing expenses for the year minus the base housing amount. The computation of the base housing amount is tied to the maximum foreign earned income exclusion. The amount is 16 percent of the maximum exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year.
According to the IRS's most recent guidance on expat taxation (Publication 54, released in late 2015), the maximum foreign earned income exclusion increased to USD100,800 for 2015. In addition, the base housing amount is USD44.19 per day (USD16,128 per year).
For 2015, the maximum amount of net earnings from self-employment that is subject to the social security part of the self-employment tax has increased to USD118,500, and an individual retirement account deduction may be taken if the taxpayer was covered by a retirement plan and had 2015 modified adjusted gross income of less than USD71,000 (USD118,000 if married and filing jointly or a qualifying widow(er)).
The publication also reminds taxpayers that if they claim the foreign earned income exclusion or the housing exclusion (or both), they must calculate the tax on their non-excluded income using the tax rates that would have applied had they not claimed the exclusions.
Physical Presence And Bona Fide Resident Tests
You are considered physically present in a foreign country (or countries) if you reside in that country (or countries) for at least 330 full days in a 12-month period. You can live and work in any number of foreign countries, but you must be physically present in those countries for at least 330 full days. The qualifying period can be any consecutive 12-month period of time. A "full day" is 24 hours; days of arrival and departure are generally not counted in the physical presence test.
A person is considered a "bona fide resident" of a foreign country if they reside in that country for "an uninterrupted period that includes an entire tax year." A tax year is January 1 through December 31. Brief trips or vacations outside the foreign country will not jeopardize status as a bona fide resident. If the foreign government concerned has determined that a person is not subject to their tax laws as a resident, the Exclusions will not be available.
The concept of "tax home" is used in connection with foreign residence. Generally, a person's tax home is the general area of her main place of business, employment, or post of duty where she is permanently or indefinitely engaged to work. A person is not considered to have a tax home in a foreign country for any period during which their abode (the place where they regularly live) is in the United States.
What's more, not all overseas locations are "foreign countries." They do not include US possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the US Virgin Islands, or American Samoa; ships and aircraft traveling in or above international waters; or offshore installations that are located outside the territorial waters of any individual nation.
Expat Filing Requirements
US citizens and resident aliens who are outside the United States (and its possessions) have the same requirements to file tax returns as anyone living in the United States. Income from worldwide sources must be considered when determining if a federal tax return must be filed. In general, foreign earned income is income received for services performed in a foreign country.
If you pay foreign taxes, it may be possible to offset these against US taxes if there is a double tax treaty with the country in which you are resident.
Additional legislation also places comprehensive reporting requirements on US citizens with income from foreign bank accounts, as well as the financial institutions with which they hold investments. Each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if the person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and the aggregate value of all foreign financial accounts exceeds USD10,000 at any time during the calendar year.
On March 1, 2016, the US Financial Crimes Enforcement Network (FinCEN) invited comments on a Notice of Proposed Rulemaking intended to revise and clarify certain provisions in the rules regarding the filing of FBAR.
The revisions would mainly apply to financial professionals who file FBARs due to their employment responsibilities. The Notice proposes to remove the provisions that limit the information reported with respect to situations when a filer has 25 or more foreign financial accounts, and instead require all US persons obligated to file an FBAR to report detailed account information on all foreign financial accounts for which they are required to file.
However, the FBAR regulations would also be amended by eliminating the requirement for officers and employees of financial institutions (FIs) to report on institutional accounts for which they have signature authority, but no financial interest, due solely to their employment, so long as their employer has an FBAR filing obligation. FIs would also be required to maintain a list of all officers and employees with signature authority over those same accounts. This list would be made available to FinCEN and law enforcement upon request.
In 2015, FinCEN received a record high 1,163,229 FBARs, up more than eight percent from the prior year. In fact, FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCEN data.
And Don't Forget FATCA
Further reporting obligations have been created by the Foreign Account Tax Compliance Act (FACTA), effective July 1, 2014.
Under FATCA, certain US taxpayers holding financial assets outside the United States must also report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. Reporting thresholds are higher than for the FBAR, the lowest being USD50,000, and vary based on whether a taxpayer files a joint income tax return or lives abroad.
The IRS has confirmed that more than 300,000 Forms 8938 were received with tax returns in the 2014 tax year, around the same as the previous year and up from about 200,000 for the 2011 tax year, the first year of the Form.
FATCA also expands the information reporting requirements imposed on FFIs with respect to accounts held abroad by US residents.
According to the IRS, more than 170,000 FFIs, located in more than 200 jurisdictions, have registered with the agency under FATCA. In most cases, those FFIs that do not comply with FATCA or participate through an IGA are subject to a 30 percent withholding tax on US source payments.
How To Escape The Net
Pretty much the only way for Americans to escape the clutches of the IRS is by taking the rather drastic step of renouncing citizenship. And according to the US Treasury's own figures, record numbers of US passport and green card holders are doing just this.
Statistics published in the Federal Register show that 4,279 US taxpayers gave up their passports or their green cards in 2015 – over 25 percent more than the previous record of 3,415 set in 2014. The number of individuals giving up their citizenship has been notably greater in the last three years. Before 2014, the previous record was 2,999 in 2013. The highest level in the years before that was only 1,781 in 2011.
Although there is no outright proof of a link, it is notable that the acceleration in the number of individuals giving up their citizenship has coincided with increasingly onerous reporting obligations on US expats and those with foreign financial interests, particularly the introduction of FATCA.
However, given that US citizenship is prized highly, not only by patriotic Americans, but by migrants trying to make a better life for themselves, the decision to give it up is always going to be a highly controversial one.
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