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Expat Briefing Editorial Team
21 April, 2015
As most American expats are no doubt well aware, tax obligations to the United States do not cease once you have crossed the US border. Indeed, the US Internal Revenue Service (IRS) recently reminded American citizens and resident aliens, including those with dual citizenship, who have lived or worked abroad during all or part of 2014 that they may have a US tax liability and a filing requirement in 2015. These tax requirements are summarised here.
Most People Abroad Need to File
The agency pointed out that a filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit, that may substantially reduce or eliminate their US tax liability. These tax benefits are not automatic and are only available if an eligible taxpayer files a US income tax return.
The IRS said that the tax return filing deadline is June 15, 2015, for US citizens and resident aliens living outside the United States and Puerto Rico. To use this automatic two-month extension (from the standard April 15 deadline), taxpayers must attach an explanatory statement to their return.
Non-resident aliens who received income from US sources in 2014 also must determine whether they have a US tax obligation. The filing deadline for non-resident aliens can be April 15 or June 15 depending on the sources of their income.
Special Reporting for Foreign Accounts and Assets
The IRS noted that US citizens and resident aliens are required to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. Certain taxpayers may also have to fill out and attach to their return a statement of their foreign financial assets, as the return 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.
Separately, those taxpayers with foreign accounts whose aggregate value exceeded USD10,000 at any time during 2014 must electronically file a Report of Foreign Bank and Financial Accounts (FBAR). The FBAR should be forwarded to the Treasury Department by June 30, 2015, and must be filed electronically.
In addition, certain taxpayers may have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, US citizens, resident aliens, and certain non-resident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeded USD50,000 on the last day of the tax year, or USD75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad).
IRS Simplifies Reporting for Canadian Retirement Accounts
The IRS also reminded taxpayers that it has eliminated a special annual reporting requirement that has long applied to taxpayers who hold interests in either of two Canadian retirement plans. As a result, many Americans and Canadians with registered retirement savings plans and registered retirement income funds no longer need to report these details. However, this change does not affect any other reporting requirements that may apply.
Report in US Dollars
Any income received or deductible expenses paid in foreign currency must be reported on a US return in US dollars. Likewise, any tax payments must be made in US dollars.
The appropriate forms require the use of a December 31 exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently.
Taxpayers who relinquished their US citizenship or ceased to be lawful permanent residents of the United States during 2014 must file a dual-status alien return, attaching Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with the IRS by the due date of the tax return (including extensions).
Free File and E-File
US citizens and resident aliens living 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 USD60,000 or less can use brand-name software to prepare their returns and then e-file them for free. A limited number of companies provide software that can accommodate foreign addresses.
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.
Both the e-file and Free File electronic filing options are available until October 15, 2015, for anyone filing a 2014 return.
Foreign Earned 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 USD99,200 of their wages and other foreign earned income in 2014. The FEIE limit is rising to USD100,800 for the 2014 tax year.
To qualify for the foreign earned income exclusion, a US citizen or resident alien must:
The FEIE is limited to the actual foreign earned income minus the foreign housing exclusion (see below). 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:
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.
Foreign Housing Tax Deduction
On April 14, 2015, the IRS issued Notice 2015-33, which provides inflation-adjusted limits for foreign housing expenses for the 2015 tax year. The Notice shows how an individual can elect to exclude certain housing costs from gross income with effect for taxable years beginning on or after January 1, 2015.
Under a specified formula, the US tax code generally limits the allowable housing expenses to 30 percent of the FEIE amount. Assuming that a qualified individual spends their entire taxable year abroad within a tax year, the maximum housing expenses limit for 2015 would be USD30,240.
However, the IRS can adjust the maximum limitation based on geographic differences in housing costs relative to housing costs in the US. It usually issues annual notices with those adjustments, and Notice 2015-33 therefore includes a table listing the foreign locations for which the IRS is allowing an increased limitation on housing expenses, due to high housing costs relative to housing costs in the US.
For example, in Hong Kong, the limitation has remained at USD114,300, and in Moscow at USD108,000. On the other end of the scale, the limitation on housing costs in the Cayman Islands is only USD48,000, and in the Bahamas (Nassau) it is USD49,700. Geneva, Bermuda, Tokyo, London, and Singapore now see limits of USD95,200, USD90,000, USD83,500, USD85,300, and USD83,000, respectively.
In locations where the limitation has increased from the amount in 2014, the Notice also allows taxpayers who incurred housing expenses in 2014 to elect to apply the 2015 tax year limitation amount to the 2014 tax year.
It is also indicated that future annual notices providing adjustments to housing expense limitations will make a similar election available to qualified individuals that incur housing expenses in the immediately preceding year. For example, when adjusted housing expense limitations for 2016 are issued, taxpayers should be able to apply those adjusted limitations to the 2015 taxable year.
US taxpayers at home or abroad with tax questions can refer to the International Taxpayers landing page and 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.
More information on the tax rules that apply to US citizens and resident aliens living abroad can be found in Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad, available on IRS.gov.
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