If you are an American living abroad — dubbed an “expat” — you are still expected to pay income taxes and file income tax reports to the IRS. The United States is the only country in the world that has this requirement and it is mandatory until and unless one renounces citizenship.
Being an expat in recent years has become more difficult. In 2010, Congress passed FATCA, which was enacted as a means to find foreign accounts of US taxpayers (such as a Swiss bank account). Overseas banks must also report to the IRS any bank accounts held by Americans; this has led to the unintended consequence of many banks choosing not to service expats because of the additional headache for the particular financial institution.
And now compliance has become even more onerous for expats. The IRS has announced the permanent closing its three remaining walk-in offices at the U.S. embassies in London, Paris, and Frankfurt, by the end of the fiscal year. Taxpayers abroad are expected to use the internet for all their tax needs. But woe to the international taxpayer who makes a filing mistake; you can be sure that the IRS will levy hefty fines.
“For foreign citizens who need an Individual Taxpayer Identification Number (ITIN) to do things like sell property in the U.S. or claim dependents on a U.S. tax return, the process could be even more difficult. Ms. Otto, the accountant, says that when she was based in France, foreigners could get an ITIN by getting a notarized copy of their passport and submitting that with an ITIN application to the IRS at the embassy locations abroad.
But now foreigners who need an ITIN have to mail their passport to an IRS office in the U.S. for verification. “What person in his right mind is going to mail his passport to the IRS?” she asks.”
The number of taxpayers living abroad has grown substantially in the last five years, with some estimates as much as a 50% increase. It is certainly not a time to reduce services to our overseas Americans. However, the IRS sees fit to protest budget cuts by doing that — just not just abroad, but in all facets of customer service to taxpayers.
*To get an idea of tax compliance for expats, check out this very good, comprehensive list of important forms below
Common Overseas Tax Forms
Form 2555 & 2555- EZ: These forms are for calculating your Foreign Earned Income Exclusion (FEIE) and to calculate your Foreign Housing Exclusion or Deduction. If you meet certain foreign residency requirements, you may be able to exclude up to $99,200 of earned income in 2014 and a portion of your foreign housing expenses from U.S. income tax. Note that this exclusion does not apply to self-employment taxes. If you are self-employed abroad, you are still subject to U.S. Social Security taxes unless you live in one of the 25 countries with which the U.S. has a Social Security Totalization Agreement. The FEIE is generally advantageous to use when income tax rates in the foreign country are lower than in the U.S. and/or your total earned income is below the exclusion threshold.
Form 1116: This is the Foreign Tax Credit form and it is used to claim a credit against your U.S. income tax for income taxes paid in the foreign country. This credit applies both to foreign earned income (wages, self-employment income, etc.) and unearned income (interest, dividends, capital gains, rents, etc.). This is generally the most beneficial form to use for residents of countries with high income tax rates, those with children eligible for the additional child tax credit and those interested in contributing to U.S. retirement plans (traditional and Roth IRAs, SEPs, solo 401(k)s, etc.)
FBAR Form FinCEN 114: This form is independent of the tax return and a separate filing requirement. The FBAR applies to any U.S. person who owns, has beneficial interest or signature authority over foreign financial accounts that exceed $10,000 in the aggregate in value at any time during the year. If you have any foreign bank accounts, this also has to be disclosed on Part III of Schedule B, whether the FBAR is required to be filed or not. FinCEN 114 must be e-filed and cannot be mailed, with the absolute filing deadline on June 30, with no extension possible.
Form 8938: This form, also known as the Fatca form, is used to report Specified Foreign Financial Assets and the income derived from them. There is some overlap with the FinCEN 114 Form (FBAR), but the filing thresholds are higher, and depend on the taxpayer’s residency and marriage status, with different thresholds for the highest value reached during the year and on the last day of the year. These thresholds range from a low of $50,000 to a high of $600,000.
Other Overseas Tax Forms
Not every tax preparer will be familiar with the forms described below. If any of these forms apply to your situation, you will need to make sure that your preparer is qualified to do the work. Many of these forms are quite complex and require special training to prepare. The IRS, for example, estimates that each Form 8621 requires almost 17 hours of record-keeping and more than 14 hours to prepare. These are the forms that are most commonly missed or filed with errors. The list that follows is illustrative and not comprehensive:
If you received a gift or inheritance from a foreign person, even though it will generally not be taxable in the U.S., depending on the amount, you may have to report it in Form 3520. This form is also used to report transactions that you had with foreign trusts. If you are grantor in a foreign trust, you are likely required to file Form 3520-A in addition to form 3520.
If you run your own business in a foreign country, you may have established a company to conduct your business. Depending on the entity’s classification for U.S. tax purposes, which will be a corporation by default or will depend on the classification election made through Form 8832, you may be required to file Form 8858 if the entity is disregarded; Form 5471 if the entity is classified as a corporation; or Form 8865 if classified as a partnership. Transactions between you and your foreign company may have to be reported on Form 926.
If you live in a country with which the U.S. has an income tax convention, you may be entitled to certain treaty benefits with respect to your foreign retirement accounts, re-sourcing of certain U.S. source income to avoid double taxation, taxation of foreign social security, etc. The treaty-based positions taken in your return may have to be disclosed in Form 8833.
If you have a brokerage account or other investments (including some foreign retirement accounts) in a foreign country, these investments may be classified as Passive Foreign Investment Companies or PFICs, which are subject to special tax rules that are generally unfavorable in nature. Most foreign mutual funds and ETFs are classified as PFICS. Each PFIC you own is reported on a separate Form 8621.
Other forms that could also apply to your situation include Form 5173: Transfer Certificate which is issued by the IRS upon the death of an American citizen overseas, and is a discharge form confirming that all taxes had been paid and which is often required by banks and brokerage firms to release funds to the estate; Form 5472 for certain U.S. corporations with 25% foreign ownership and certain foreign corporations engaged in a U.S. trade or business; and Form 720, Quarterly Excise Tax Return, to report and pay excise taxes on certain foreign life insurance premiums.
Common Tax Forms – With Some Overseas Components
The following forms are common for U.S. taxpayers but also have some international elements to be aware of:
1040: Ultimately all of your income (foreign and domestic) should end up on your form 1040. Americans married to non-Americans may be able to us the Head of Household filing status instead of married filing separately. In some cases adding a non-citizen spouse (and their income and assets) to the U.S. tax return can be beneficial. All dependents on the return, must have a U.S. tax ID number.
1040: – Schedule A: Some expenses related to being overseas may be able to be claimed as itemized expenses such as certain foreign taxes, certain moving expenses and travel, mortgage interest, medical and dental expenses etc.
1040: – Schedule B: Part III of Schedule B has information related to foreign trusts and foreign bank accounts. Make sure you check these correctly.
1040: – Schedule C. If you live overseas and are self-employed, you will still have to file a Schedule C. You may be subject to U.S. Social Security though Totalization Agreements may negate the need for paying into U.S. Social Security. You will also generally be able to contribute to a U.S. solo 401(k) or SEP IRA but these may not be tax-deferred in the country where you live and work.
For more information about overseas tax returns, you should check the IRS’s website, which has thousands of pages for your reading pleasure in a section dedicated to International Taxpayers. A good starting point for any new overseas American is Publication 54: Tax Guide for US Citizens and Resident Aliens Abroad.
A recent incident involving a woman and police officer in Indiana is a prime example of law enforcement run amok. The woman was arrested and faces charges of resisting arrest — a felony in Indiana — after she failed to immediately pull over her vehicle on a dark country road at night, and instead chose to drive less than a mile down the road to a lit, public parking lot. The woman, acknowledging the police officer with a wave, also put on her hazards as she made her way to a safer area.
The offensive officer, Porter County Sheriff’s Department Patrolman William Marshall, initially flagged her for speeding, but when he approached her in the parking lot after she stopped her vehicle there, he chastised her for not stopping immediately. Reason reported the officer saying, “What in the hell are you doing? I could arrest you for this.” She explained her rationale was safety, but, according to the officer, after she “refused to listen to how her actions put her and others in danger, Marshall said he arrested her.”
The woman, with no prior criminal record, now faces felony charges, while Patrolman William Marshall is being fully supported by his county’s sheriff’s department. The department “cited state law requiring motorists to yield to emergency vehicles and said Marshall was driving a fully marked squad car and used the lights and siren.” Never mind that the woman did acknowledge the officer; her crime was that she picked a safe, public, and well-lit parking lot instead of a dark, isolated, country road for her interaction.
Patrolman William Marshall deserves to have disciplinary action taken against him for this egregious incident. To arrest someone for not immediately pulling over a vehicle in order to ensure personal safety and liberty is contemptuous, audacious, and just plain spiteful. Such behavior is not honorable and is unbecoming of any officer. Patrolman William Marshall must be held accountable for his actions.
It’s frustrating when popular TV economists perpetuate economic myths that have been thoroughly debunked. Last week, Becky Quick, host of CNBC’s “On the Money”, interviewed Bethany McLean, Contributing Editor over at Vanity Fair. They discussed the subject of equal pay for women; unfortunately, they both asserted that women only earn 77% of pay that men do, a charge that is simply untrue, but endlessly repeated.
Factors such as education paths, child bearing choices, hours worked, and job risk are not always equal for men and women. Taking these items into consideration, the gender wage gap shrinks almost entirely, with likely no more than a 5% variance. This is also supported by the simple economic reality that if women actually did make 23% less than men in wage costs, businesses would almost entirely hire women as a means to minimize labor costs and maximize profits. Since this does not actually happen, it is obvious that the 23% wage disparity is merely a distortion perpetuated by the Left, and most notably by the White House.
It’s one thing for partisan politicians to spew such nonsense, but for an economics reporter to peddle it as well is absolutely irritating and reckless. She should know better.
I’ve been pondering the recent Harry Reid episode, where Harry Reid discussed the incident from 2012 when he openly lied about Mitt Romney not filing tax returns for 10 years. Harry Reid completely justified his behavior by stating to CNN’s Dana Bash, “”I don’t regret that at all. Romney didn’t win did he?”
How utterly different would the story be if a Republican Senator had lied in this fashion? It is absolutely incredible that Harry Reid wasn’t called out for his shameful lies. What’s more, when Romney did release his taxes shortly thereafter, disproving Harry Reid, no one issued any retraction for the blatant falsehoods.
Reid egregiously lied about the matter on three separate occasions during the 2012 Presidential election season. First, he stated in July of 2012, that Romney “didn’t pay taxes for 10 years. Now do I know that that’s true? Well, I’m not certain, but obviously he can’t release those tax returns. How would it look?”
A few days later, he spoke on the floor of the Senate, saying, “”If a person coming before this body wanted to be a Cabinet officer, he couldn’t be if he had the same refusal Mitt Romney does about tax returns. So the word is out that he has not paid any taxes for 10 years. Let him prove he has paid taxes, because he has not.”
And shortly thereafter, he referred to a unnamed, “extremely credible source” who told Reid that Romney had not paid his taxes for a decade.
This was no offhanded remark. It was a deliberate, intentional, conscious campaign to speak falsely about Mitt Romney in an effort to discredit him.
What could be considered more of an outright criminal activity than a Senator who chose to willfully lie in an attempt to influence a federal election? For someone in his position in the United States Congress, his action is an outrage. Where is the Department of Justice and the Federal Election Commission when you need them!
It’s equally distressing to consider that so many people heard Harry Reid’s accusations and just blindly accepted it. It speaks to their own bias that when they found out they had been lied to, no one was really infuriated that they were openly, blatantly manipulated.
For people to know that Harry Reid is a cheat and a liar, and yet accept his actions because the ends justified the means — what does this say about their integrity? About the credibility of this country? Have we become so cynical that we just accept this level of lying now as “politics as usual?” How can anyone actually be okay with any person, even and especially a US Senator, outright lying in order to manipulate the outcome of an election?
The great Walter Williams released a new video yesterday on the role that profit plays in the free market. Do yourself a favor and take 5 minutes to learn how important profits and losses really are.
“Is profit a dirty word? Would the world be better off without them? Or are profits progressive — the only thing that can move potatoes from Idaho to Manhattan and medicine from America to Africa? Professor and economist Walter Williams explains.”
If NYC ever survives a mayor as economically ignorant as Bill de Blasio, it will be nothing short of a miracle. Not only has he been committed to “combating income inequality” by advocating raising taxes on the wealthy, now he also is pushing for a minimum wage hike to more than $13/hour as a means to bolster the economy.
De Blasio recently announced, “It’s time for New York City businesses to take bold action—not only because hardworking New Yorkers deserve a path to the middle class and an opportunity to stay in the middle class—but because giving them that opportunity would do so much to help our economy.”
His brilliant plan is to raise the wages past $13/hour in 2016, and then indexing it to inflation over the next 3 years so that the minimum wage will be $15/hour by 2019. The current wage is $8.75/hour, which will be $9.00 as of January 1, 2016. Where does de Blasio think that extra $4/hour is going to come from? He told the business owners that it’s time do “do your part”.
Unfortunately for the workers of NYC, they have a mayor who doesn’t understand that raising the minimum wage adversely affects those whom the wage hikes purport to help, especially the poorest in NYC. Less persons would be employed at $13/hour and $15/hour than if the minimum wage had not been hiked at all. Put it another way, many would see their hourly wages drop to $0/hour. That is not “opportunity”. That is unmitigated disaster.
Roughly 2 weeks ago, I wrote about the IRS sending out corrected tax forms for the 820,000 Obamacare users who received incorrect 1095As in late January. On March 22, it was reported that, “Federal officials said on a Friday press call that about 740,000 corrected forms have been mailed out or can be downloaded from the HealthCare.gov site. About 80,000 corrected forms will be mailed and available online next week”
However, it is apparent that the IRS still has not fixed those users who remain in tax limbo right now, because it was announced that those still affected with incorrect forms are eligible now for an extension until October 15 — but only if they request it.
Those other 740,000 users who didn’t receive their correct forms until the third week of March are not eligible for the extension, but instead have to scramble to get their taxes filed by April 15th. These users were delayed an additional 7 weeks after the government failed to send them their correct 1095As on time (January 31). The 1095A is the proof of insurance for tax forms, and is necessary to calculate whether or not the proper subsidy amount was given in 2014.
The kicker here is that a person must know that he or she needs to request the tax extension. Otherwise, they will still responsible to have their taxes filed for April 15th.
This is nearly as absurd as the scenario that is unfolding with the Obamacare users who are both uninsured and do not make enough income that requires them to file taxes. In order to claim the penalty exemption based on lack of adequate income…they must file a tax return. And what if they don’t know to do so? If they do not claim their exemption, they will be on the hook for the “shared responsibility” payment and “are likely to get hit with an unexpected tax bill later on.”
Obamacare continues to be an onerous, burdensome mess for this country.
This year is the first year for which proof of health insurance, or payment of the “shared responsibility” tax/fee/penalty, is required to be accounted for on one’s tax return. But what happens when a person does not meet the income threshold to actually have to file their taxes?
The Weekly Standard points out that a conundrum exists for the poor. Under Obamacare rules, the economically disadvantaged,
“can get an income-based exemption if ‘you don’t have to file a tax return because your income is below the level that requires you to file.’ Sounds simple enough, right? Until further investigation reveals that this exemption is claimed directly on the tax return. That’s right – the tax return you’re not required to file.”
So the fate of those who are uninsured and also do not file? If they do not claim their exemption, they will be on the hook for the “shared responsibility” payment and “are likely to get hit with an unexpected tax bill later on.” That is sloppy at best and egregious at worst.
Obamacare purports to help those who, economically, are the least among us. The law provides financial help to purchase healthcare for the poor, or a path of exemption for those who cannot afford healthcare or the uninsured penalty. Yet it fails to provide a mechanism of compliance for those who among us who are too poor to pay taxes and the penalty. In this regard, Obamacare falls short of its most basic goals — and will wreak tax havoc in the future for those poorest ensnared by this deficiency.
