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Tax Deadline Looms For US Expats

Expat Briefing Editorial Team
02 June, 2014


The Internal Revenue Service (IRS) has reminded US citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013, that they may have a US tax liability and a filing requirement in 2014.

The filing deadline is Monday, June 16, 2014, for US citizens and resident aliens living overseas, or serving in the military outside the US on the regular due date of their tax return. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. Normally, the tax filing deadline in the US is April 15, but there is an automatic two-month extension for the aforementioned classes of taxpayer. Non-resident aliens who received income from US sources in 2013 also must determine whether they have a US tax obligation. The filing deadline for non-resident aliens can be April 15 or June 16 depending on sources of income.

This, however, is just about the only break US expats get when it comes to tax. Federal law requires US citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets. This is a recently introduced obligation, brought about by the Foreign Account Tax Compliance Act (FATCA – see below).

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires US citizens to report the country in which each account is located. Generally, US citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds.

Separately, taxpayers with foreign accounts whose aggregate value exceeded USD10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online.

Taxpayers abroad can now use IRS Free File to prepare and electronically file their returns for free. This means both US citizens and resident aliens living abroad with adjusted gross incomes of USD58,000 or less can use brand-name software to prepare their returns and then e-file them for free. A second option, Free File Fillable Forms, the electronic version of IRS paper forms, has no income limit and is best suited to people who are comfortable preparing their own tax return. A limited number of companies provide software that can accommodate foreign addresses. Both e-file and Free File are available until October 15, 2014, for anyone filing a 2013 return.

Any US taxpayer at home or abroad with tax questions can use the online IRS Tax Map and the International Tax Topic Index to get answers. These online tools assemble or group IRS forms, publications and web pages by subject and provide users with a single entry point to find tax information.

FATCA

FATCA adds yet another reporting burden on those with interests in foreign accounts. So US citizens, US individual residents, and what the IRS describes as “a very limited number of non-resident individuals” who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets on new Form 8938 ‘Statement of Specified Foreign Financial Assets’, which must be attached to the annual US income tax return (Form 1040).

Individuals who do not have to file an income tax return for the tax year do not need to file Form 8938, even if the value of their specified foreign assets is more than the appropriate reporting threshold. Those required to file Form 8938 do not have to report financial accounts maintained by: a US payer (such as a US domestic financial institution); the foreign branch of a US financial institution; or the US branch of a foreign financial institution.

For individuals who are resident in the United States, if the total value of the specified foreign assets is at or below USD50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than USD75,000 at any time during the tax year. Higher asset thresholds apply to US taxpayers who file a joint tax return or who reside abroad.

Married taxpayers filing a joint income tax return and living in the US must report if the total value of their specified foreign financial assets is more than USD100,000 on the last day of the tax year or more than USD150,000 at any time during the tax year. Married taxpayers filing separate income tax returns and living in the US must report if the total value of their specified foreign financial assets is more than USD50,000 on the last day of the tax year or more than USD75,000 at any time during the tax year.

US taxpayers living abroad must file Form 8938 if they file a return other than a joint return and the total value of specified foreign assets in the foreign account is more than USD200,000 on the last day of the tax year or more than USD300,000 at any time during the year. Non-resident taxpayers filing a joint return and with specified foreign assets of more than USD400,000 on the last day of the tax year or more than USD600,000 at any time during the year must also file Form 8938.

The IRS currently defines a taxpayer living abroad as: a US citizen whose tax home is in a foreign country and who is either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year; or a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

The following types of foreign assets must be reported on Form 8938:

  • Financial (deposit and custodial) accounts held at foreign financial institutions
  • Foreign stock or securities not held in a financial account
  • Foreign partnership interests
  • Foreign mutual funds
  • Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor
  • Foreign-issued life insurance or annuity contract with a cash-value
  • Foreign hedge funds and foreign private equity funds

In addition to accounts held at foreign branches of US financial institutions and US branches of foreign institutions, the following assets are not reportable under FATCA:

  • Domestic mutual fund investing in foreign stocks and securities
  • Indirect interests in foreign financial assets through an entity
  • Foreign real estate held directly
  • Foreign real estate held through a foreign entity (although the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate)
  • Foreign currency held directly
  • Precious Metals held directly
  • Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles
  • Social Security- type program benefits provided by a foreign government

Penalties for failure to report foreign financial assets on Form 8938 when required under the legislation are harsh. Non-disclosure may result in a penalty of USD10,000, and an additional fine of up to USD50,000 for continued failure after IRS notification. Furthermore, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

See last November’s Expat Briefing feature on FATCA for more details on this law.

Foreign Income Exclusion

US citizens residing and working abroad who qualify for the foreign earned income exclusion (FEIE) won’t have to pay tax on up to USD97,600 of their wages and other foreign earned income in 2013. The FEIE limit is rising to USD99,200 for the 2014 tax year.

To qualify for the foreign earned income exclusion, a US citizen or resident alien must:

  • Have foreign earned income (income received for working in a foreign country),
  • Have a tax home in a foreign country, and
  • Meet either the bona fide residence test or the physical presence test

In addition to the foreign earned income exclusion, qualifying individuals may also choose to exclude or deduct from their foreign earned income a foreign housing amount. Starting with the 2006 tax year, the amount of qualified housing expenses eligible for the housing exclusion and housing deduction is limited. The limitation on housing expenses is generally 30% of the maximum foreign earned income exclusion.

The FEIE is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure the foreign housing exclusion before determining the amount for the foreign earned income exclusion.

Since the FEIE is voluntary, qualifying individuals must choose to claim the exclusion. The FEIE and the foreign housing cost amount exclusion are claimed and figured using Form 2555, which must be attached to Form 1040. However, if only the FEIE is claimed, a shorter Form 2555-EZ may be used instead.  Once the choice is made to exclude foreign earned income, that choice remains in effect for the year the election is made and all later years, unless revoked.

Foreign earned income does not include the following amounts:

  • Pay received as a military or civilian employee of the US Government or any of its agencies
  • Pay for services conducted in international waters (not a foreign country)
  • Pay in specific combat zones, as designated by an Executive Order from the President, that is excludable from income
  • Payments received after the end of the tax year following the year in which the services that earned the income were performed
  • The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer
  • Pension or annuity payments, including social security benefits

A qualifying individual may claim the FEIE on foreign earned self-employment income.  The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. 

According to new research, reported by Expat Briefing last week, it is unclear whether the FEIE actually provides any net economic benefits.

What is clearer, however, is that more and more Americans are relinquishing their US citizenship, with the country’s worldwide tax basis and increasingly onerous and intrusive tax compliance rules said to be a huge factor in the jump in the number of people handing back their US passports.




 

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