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Expat Briefing Editorial Team
16 January, 2017
For Americans, tax obligations in the United States don't stop when they cross the US border, and it is generally the case that expats are required to file a US income tax return irrespective of the length of their expatriation. What's more, increasingly stringent financial reporting requirements have increased the filling burden on US expats, and penalties for non-compliance – innocent or otherwise – can be harsh. So, in this special feature, we summarize what the Internal Revenue Service (IRS) and other agencies expect of US expats, and when.
Federal Income Tax
All US citizens and green card holders must file a tax return (Form 1040) regardless of whether they live abroad. However, for US expats, the deadlines are slightly more flexible. If a taxpayer is an overseas resident when the tax return deadline falls, they qualify for an automatic two-month extension. Expats who returned to the United States prior to the deadline must file their tax returns by the due date.
Traditionally, the tax return deadline for federal tax purposes in the United States is April 15 following the calendar year to which the filing relates. Because April 15 falls on a Saturday in 2017, and the next working day is the Emancipation Day national holiday, the deadline falls on April 18 this year.
However, most expats qualify for an automatic two-month extension, meaning that they have until June 15, 2017 to submit their tax returns. But any tax owed in the United States must be paid by April 18, 2017. Six-month extensions are also available on request to the IRS, and are granted after submitting the relevant form within the two-month automatic extension period. In 2017, the six-month extended deadline is October 17.
If no payment is made by April 18, but any tax due is paid by the extended deadline of June 15, the IRS won't assess a penalty on the late payment. However, interest will be charged on the overdue amount.
Expats can take advantage of certain deductions on wages and housing costs. However, even if an expat has no tax liability in the United States, they must still file a tax return.
Expats who do owe taxes may have to make estimated tax payments on a quarterly basis.
Form 114, the Report of Foreign Bank and Financial Accounts, of FBAR for short, must be filed with the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the Treasury Department. The form must be filed electronically and is only available online through the BSA E-FilingSystem website.
Generally, taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded USD10,000 at any time during the calendar year must file Form 114 with FinCEN by the tax return deadline in the following year. This deadline was recently changed from June 30 in the year following the calendar year to which the filing relates.
In December 2016, FinCEN announced an extension to the due date for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity, to April 15, 2018. This extension only applies to an employee or officer of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a "controlled person"); or an employee or officer of a controlled person of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.
According to the IRS, FBAR filings have risen dramatically in recent years as FATCA (see below) phases in and other international compliance efforts have raised awareness among taxpayers with offshore assets. In 2015, FinCEN received a record high 1,163,229 FBARs, up more than eight percent from the prior year. In fact, FBAR filings grew on average by 17 percent per year during the previous five years, according to FinCEN data.
Taxpayers with even small amounts of foreign assets are urged to check whether they have a filing requirement under the FBAR rules.
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. This must be filed alongside the individual income tax return (i.e., by June 15 with the automatic extension for expats, or by October 16 if a six-month extension has been granted).
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.
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.
Penalties for failure to report foreign financial assets on Form 8938 when required 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.
Any expats in the slightest doubt about their US tax filing obligations are advised to seek the advice of a reputable tax professional!
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