With tax season coming up for American expats and other U.S. tax persons, we’d like to highlight a few things regarding preparing your returns. As an American expat, you probably already know that the IRS grants an automatic two-month extension for your return. This means that federal returns are not due until June 15th. Even then, you can file for another extension if required, thereby extending the deadline to December 15th.
Should you owe the IRS money, however, you need to pay the expected balance due by April 15th in order to avoid penalties and interest. It is best to overpay and expect a refund than risk interest and penalty for under-payment.
Important Guidelines and Tips for Expatriate Tax Returns
The six main areas you should focus on for your next expatriate tax return, some of which might save you a substantial amount of money, are as follows:
1. FBAR Reports & Form 8938
If you have aggregated assets of more than $10,000 in a bank, investment, retirement or life insurance with cash value outside the U.S., you must electronically file an FBAR report (Foreign Bank Account Report) via FinCEN Form 114 by June 30th, no extensions granted.
Should you file a joint U.S. income tax return and your total foreign financial assets exceed $400,000 at the end of the year or $600,000 at any point of the year, you also need to file a Form 8938 asset statement. Single filers have a significantly lower threshold to be required to file this disclosure form: $50,000 in foreign assets as of the last day of the year, or $75,000 at any point in the year. If you are married but file a separate return, the threshold is $200,000 at the end of the year, or $300,000 at any point during the year.
If you failed to file FBAR reports in the past, you need to speak to counsel to come back into compliance immediately. If you failed to make a disclosure in last six years (’09 – ’14), you cannot make a quiet disclosure and should seek counsel under attorney-client privilege in order to come into compliance. For more on this process and a free 30-minute confidential assessment of your case, please contact us.
2. Foreign Account Tax Compliance Act (FATCA)
FATCA was signed into law in 2010 and has since created significant revenue for the IRS and countless headaches, especially for those U.S. tax persons living abroad or holding off-shore assets.
More than 150,000 banks worldwide have signed onto FATCA to comply with information- sharing agreements with the U.S. government, and the vast majority of these banks sent W8 or W9 forms to its U.S. account holders advising them of their need to comply with this act. Yet some of these requests have not been in the best interest of account holders, as banks have abruptly closed accounts and liquidated assets at losses in an effort to fire U.S. tax persons as clients and eliminate compliance at the bank level.
As a result, the need to engage in immediate FATCA reporting for U.S. tax persons is highly advisable, whether the bank has disclosed their identities or whether these individuals have the chance to comply before a disclosure is made.
One of the important aspects of FATCA is a possible IGA (Inter-Governmental Agreement) the IRS has struck with your respective countries. Have a look on the link above to see which country or countries might apply in your case and check your deadline. IGA model 2 countries need to exchange information with the IRS by March 31, model 1 by September 30th.
Since navigating these issues is fairly complex, can lead to a criminal prosecution, and can result in mandatory penalties and interest exceeding 50% of your account balances, we advise seeking professional help for which Five Stone Tax Advisers is highly qualified.
The Five Stone value proposition is second to none: A multicultural team of CPAs who specialize in international taxation work along with international tax attorneys under a single roof, negotiate cases face to face – since their Austin, Texas office is right next door to the IRS OVDP headquarters – have proficiency in over 10 languages, and serve clients in over 25 countries and four continents by leveraging their Zurich, Switzerland office.
3. Overseas Voluntary Disclosure Initiative (OVDI) & Program (OVDP)
If you have inadvertently overlooked your responsibilities for reporting income, filing an income tax return, an FBAR, and/or a FATCA informational form, you may qualify for the friendly 2014 OVDP or streamlined compliance program.
To see whether you qualify, speak to one of our experts in a 30-minute assessment of your case. Your conversation is fully confidential and remains protected under attorney-client privilege.
4. Foreign Tax Credits & Tax Treaty Implications
The Internal Revenue Code requires U.S. tax persons to report all their income from all sources worldwide. This means that if you live abroad and earn income above the filing requirement, for instance $10,000 in 2014 for a taxpayer filing single, you must file a U.S. income tax return and report such income.
Since this income is typically already taxed at the source (foreign country), tax treaties exist between the U.S. and other countries to prevent double taxation of income. While you are required to report the foreign income and file a U.S. tax return, you may likely be exempt from U.S. tax by applying the proper tax treaty provisions and claiming the appropriate foreign tax credits.
Applying international tax law concepts on U.S. tax returns is not a task for your typical CPA or tax accountant handling the regular domestic clients. These individuals are not trained or equipped to understand foreign tax returns, foreign tax laws, and particularly the complex application of foreign tax treaties and allocation of tax credits on your U.S. returns.
The team of international tax experts at Five Stone Tax Advisers includes CPAs and tax attorneys who solely focus on these issues. They have fluency in over 10 languages and have interacted with over 25 foreign tax jurisdictions. To find out more about how they can help you with the preparation of your returns and the application of tax treaties and foreign tax credits, speak to one of our experts in a 30-minute confidential assessment of your case. Your conversation is fully confidential and remains protected under attorney-client privilege.
5. Foreign Earned Income Exclusion
Not only do U.S. citizens in most countries benefit from a $99,200 net tax exclusion, if you have resided for at least 330 days in the foreign country from the time you moved there until your filing date (June 15), you can apply that exclusion even to an incomplete year. You calculate this through the so-called physical presence test. Time requirements may be waived under certain circumstances as published yearly by the IRS.
Once again, properly applying the foreign earned income exclusion is not a task suitable to your typical CPA or tax accountant handling domestic clients. The IRS heavily audits returns claiming foreign earned income exclusion, and we’ve seen other tax preparers get their clients in trouble because of their limited skills in this arena. Our team of international CPAs and tax attorneys would be glad to help you sort this out.
6. Filing Status: Married or Separate Filing?
In the case where both taxpayers are either U.S. citizens or residents holding green cards, a joint return is clearly the more cost-effective and tax-efficient option. If one taxpayer is foreign-born, and/or not a U.S. citizen or green-card holder, it may be best for the U.S. citizen to file a separate return.
Non-resident aliens with U.S. source income, however, will have to file anyway and they may make an election to be treated as residents for tax purposes. By making such election, they’ll be able to file a regular income tax return as a U.S. citizen or resident would file, and be eligible for higher deductions and credits. One thing to keep in mind, however, is that making such elections converts the non-resident to a U.S. person for tax purposes, and therefore subjects that individual to the FBAR and FATCA filing requirements mentioned above.
In order to identify what filing status produces the best possible outcome from an effectiveness and efficiency standpoint, please contact our team of international tax experts. We will conduct a confidential assessment of your case and provide you with the options that best fit your needs.
Washington is forever working on tax reform, but as the website americans abroad notes, there continue to be many issues of concern for American expats such as “the cost and time involved for compliance including tax preparer, complexity of filing and uncertainty on how to file, instances of double taxation, penalization caused by U.S. taxation of foreign pension funds, foreign exchange risk and fiscal burden related to filing taxes with the U.S. dollar as the functional currency when income and expenses are in another currency, (and) difficulties with access to foreign banking due to FATCA (reporting).”
Tax issues are cause of much concern to expats and can be a serious drain on a person’s day-to-day functioning and well-being. We are exposed to this every day and want to help you sling that one stone (of five) at the IRS Goliath in order to obtain the best possible outcome for you. Our goal is to help you succeed and give you peace of mind throughout the process and thereafter. Nothing is more satisfying to us than clients who are content with their tax outcome and can sleep well again.
In summary, the compliance with and reporting through the FATCA forms with FATCA is substantially complex. Taxpayers facing these issues should consult with an experienced practitioner to ensure that all items are filled out correctly.
About Five Stone Tax Advisers
Five Stone Tax Advisers has years of experience negotiating directly with the IRS to get the best possible outcome for you. Our International Tax Advisory and Compliance unit has a team of tax attorneys, certified public accountants and enrolled agents that form a single sourced point of contact that will provide services for all the legal, compliance and financial reconstruction aspects of offshore account cases.