As an American living and working abroad you better be fully armed with a knowledge regarding IRA for US expats, its’ opportunities and tax savings you can achieve. For example, do you know that depending on your foreign income you may or may not contribute to your regular or Roth IRA as an American abroad?
A lot of US expats qualify for the Foreign Earned Income Exclusion and they choose it to exclude the first $102,100 (as of the 2017 tax year) of foreign wages or self-employed income from the US federal income taxes. But not so many people know that if you are using the Foreign Earned Income Exclusion, then you signed yourself to its restrictions on your contributions to an IRA. Read further to find out more about it.
Yes, eventually the IRS will find your foreign bank account. When they do, hopefully, your foreign bank accounts with balances over $10,000 have been reported annually to the IRS on an FBAR “foreign bank account report” (Form 114). And hopefully, interest and dividends from your foreign bank accounts will already be reported on your annual US tax return, including foreign disclosure forms and statements (Form 1040). When the IRS finds your foreign bank account and it has not been reported properly you are in a lot of trouble. Just Google FBAR penalties- nothing good comes up.
But I Don’t Owe Any Extra Taxes? I Live Overseas And Pay Tax Where I Live? My Exemption For Working overseas Eliminates Any US Tax Owed?
Read the articles you googled on FBAR penalties. Form 114 is a disclosure statement only, but some of the smaller penalties are $10,000 and 5% of your highest account balance. The penalties escalate from there to higher civil penalties and possible criminal penalties. You need to file an FBAR disclosure annually on your foreign bank account if the balance exceeded $10,000 on any day during the tax year.
Since the enactment of FATCA, US persons (citizens and green card holders) overseas have, via lobbying efforts, requested relief from the additional tax compliance burdens placed upon them that appear to be increasing their costs of living overseas (which is generally more expensive than living in the USA anyway).
Their arguments fall into the following three: (1) generally, they file foreign tax returns and pay local tax preparation services but must also pay an additional $2,000- $3,000 for a US tax preparation service specialized in foreign residence; (2) generally the foreign income exclusion and foreign tax credit wash out the U.S. tax burden but for anomalies in definitions between retirement plans that cause undue burden on foreign residents US persons; and (3) US persons must pay more for financial services because they have become the pariah of the financial world.