19 Jun Tom LR Griffiths explains the ins and outs of US expat tax compliance
With just days to go until the US tax deadline for expats of 15 June 2019, do you have everything covered?
When living and working abroad, US citizens and green card holders must file a tax return with the IRS. Despite this, many US expats simply don’t know their obligations, or assume that because they are paying taxes in the country they’re living and working in, US taxes are no longer their concern.
Why every US expat needs a tax strategy for compliance
Every year, many US expats fail to meet the tax deadline set by the IRS. Some are concerned that they haven’t filed a tax return with the IRS for a few years and put it off in fear of penalties and fines.
Either way, as a US expat, it is compulsory and mandatory to file a return with the IRS. Although lots of US expats don’t have to actually pay any tax, they must always declare their worldwide income by the deadline set by the IRS.
Your US expat tax strategy
- Get compliant
US citizens overseas continue to be taxed as if they were still residents of the US. This means that every US expat with a minimum of $12,000 annual income (or $400 income from self-employment) must file a federal tax return. The return will tell the IRS the extent of the expat’s worldwide income.
Your first step as a US expat is to ensure you are compliant and up to date with your taxes. The IRS can access overseas tax information from foreign Governments. They can also get hold of your investment account details and foreign bank account details directly.
If you need to file a number of years taxes to become compliant, you can do this under the Streamlined Procedure Programme (SPP). This is an amnesty programme from the IRS, and through it you can avoid penalties. However, be aware you need to do this before the IRS contacts you.
- Claim exemptions
As a US expat, you can generally cut your tax bill sharply, if not completely eradicate it, by claiming a number of exemptions. These include:
- Foreign Tax Credit – this gives you credit that matches the amount you’ve paid in foreign taxes.
- Foreign Earned Income Exclusion (FEIE) – under this you can exclude $105,900 (2019 figure) of your earned income.
Talk with an international tax expert to work out which exemption is best for your circumstances. This will depend on where your income comes from, the type of income you earn and your family situation.
You must actively file for these exemptions, they are not granted automatically under the UK-US tax treaty. It’s vital to understand which can benefit you, as you can usually wipe out your US tax bill.
- Understand extra filing requirements
If the total of any foreign investment or bank accounts you control add up to more than $10,000 at any one time during the tax year, you must file a Foreign Bank Account Report (FBAR). US expats that fail to do so will be penalised starting at $10,000 per year for noncompliance or even unintentional errors.
Expats must also report foreign financial assets using Form 8938 if they are over $200,000 in total. It’s also possible that expats with a stake in a business registered overseas will be subject to new taxes under the Tax Reform this year.
- Claim Child Tax Credit if possible
If you claim the Foreign Tax Credit and have kids that hold a US social security number, then you can claim the newly introduced Child Tax Credit. Introduced under the Trump Tax Reform, this new credit effectively merged the previous Child Tax Credit and Additional Tax Credit.
The new system means that US expats owing tax to the IRS can claim up to $2,000 credit for each dependent child that qualifies.
What about late tax returns?
As mentioned above, the SSP is currently in force. It’s not known how long this will be open to US expats, but for now it’s available for people who didn’t know they had to file while living and working abroad. If you’re successfully accepted, you only need to file the last three years’ worth of returns as well as six years of bank statements. These won’t be penalised under the scheme.
If you do owe tax as an expat and you fail to pay by the deadline, interest is calculated from 15 April until the payment is made. After this a penalty from 0.5% to 25% will be levied for every month it isn’t paid.
Get professional tax help
I’d always advise US expats to enlist the help of a specialist in international taxes. It’s a complex filing system, and it’s easy to miss obligations doing it alone. At Ingleton Partners we have the experience and expertise to take the stress out of your US expat taxes and make sure your bill is as low as possible through claiming the correct extensions.