Tag Archive for Olivier Wagner

U.S. Taxes On Foreign Income: Who Should File A U.S. Expatriate Tax Return?

Olivier Wagner- Filing An Expatriate Tax Return

While many Americans abroad wonder if they have to pay US taxes on foreign income, the real question is about filing tax return itself. Many of US citizens living overseas do not owe any taxes to IRS. However, it doesn’t mean they don’t have to report their income on Form 1040. Majority of US expats confuse the filing threshold with Foreign Earned Income Exclusion. The latter one doesn’t determine your filing liabilities. It is there to exclude all or part of your foreign-source wages and self-employment income from U.S. federal income tax. Yet you need to file federal tax return and form 2555 to use Foreign Earned Income Exclusion.

There are a few things to remember about US tax filing obligations. First of all, determine if you are a U.S. person for tax purposes, as you do not necessarily need to have a US passport to possibly have US tax filing obligations. You may even need to file even if you don’t earn any money yet you are married to someone who has income. Yes, we know that US taxes can be quite complicated!

Tax Tip 1: Even though we have already mentioned FEIE above, don’t rush to select Foreign Earned Income Exclusion on your US expat tax return. In many cases, choosing Foreign Tax Credit is more beneficial. Tax professionals prefer the latter for a number of reasons.

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U.S. Expatriates Can Claim Foreign Tax Credit Filing Form 1116

Olivier Wagner - Form 1116
What Is Form 1116 And Who Needs To File It?

When talking about US taxes and taxation of US citizens who live abroad, you may have heard of Foreign Tax Credit and the possibility to offset the US tax owing by using the taxes paid to another country. That way you can narrow the tax owing down to zero!

Most of the US international tax experts prefer claiming Foreign Tax Credit (Form 1116) on client’s U.S. tax return rather than preparing form 2555 (Foreign Earned Income Exclusion), since it is more beneficial. Read further to learn why FTC is a better way to save money on your US expat taxes.

Here are 5 quick facts about IRS Form 1116 and US tax returns:

  1. You claim Foreign Tax Credit on your US expat taxes by filing Form 1116
  2. You attach this form to a Form 1040, your individual US tax return
  3. The credit reduces your US tax liability on expat income dollar for dollar
  4. You cannot take Foreign Tax Credit against income which you have previously excluded by the Foreign Earned Income Exclusion
  5. And you can’t receive a refund of foreign taxes paid through your US tax return

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View An Astonishing Achievement By These Tax And Business Professionals For 9 Million Americans Abroad

Kat Jennings - Thank These Gentlemen

This is an important post that we encourage you forward on to any person you know who is an American working and living abroad; or any accidental Americans who are caught up in this tax legislation. Please watch this video where John Richardson interviews Jim Gosart, Olivier Wagner and Solomon Yue about their work on behalf of all Americans Abroad. Although many other significant contributors have helped along the way, these gentlemen have been greatly instrumental in getting tax legislation H.R. 7358 to Congress.

If you have followed any of the initiatives to get this bill in front of Congress, you must know what they have accomplished is astonishing. The goal has always been to make the tax treatment of Americans Abroad fair. The new bill presented in Congress is appropriately called “Tax Fairness For Americans Abroad Act of 2018″ and you should follow it closely.

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What U.S. Expat Needs To Know About Foreign Earned Income Exclusion

Olivier-Wagner- What U.S. Expat needs to know about Foreign Earned Income Exclusion

While all Americans are taxed in their worldwide income regardless where they reside, they also have Foreign Earned Income Exclusion to reduce the tax burden. And this is what our today’s tax infographic is about. In 2018 you can eliminate up to $104,100 of foreign earned income on your U.S. expat tax return. Let’s look into details and what this exclusion is about. Read more

Passport Revocation By The IRS: What You Need To Know

Olivier Wagner, Passport Revocation By The IRS

More than a year ago, Congress passed law HR 22. It resulted in IRC section 7345 “Revocation or denial of passport in case of certain tax delinquencies”

This is a far-reaching law which covers all taxpayers owing more than $50,000 in back taxes. The intent of the taxpayer to leave the country is not a criterion. Nor it is limited to criminal cases, civil penalties are enough.

Before the IRS can revoke your passport, or prevent you from obtaining a new one, these seriously delinquent tax debt needs to be debt for which a:

  • The government has issued a notice of federal tax lien and all administrative remedies under IRC § 6320 have lapsed or been exhausted
  • The government has issued the levy

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Bona Fide Residence Test For U.S. Expats Explained

Olivier Wagner, Expatriate Tax Expert

We want to talk about Bona Fide Residence Test, which one shall pass to qualify for FEIE. Are you an American abroad and you earn more than $10,000 USD a year? Then you are required to file U.S. federal tax return. If this is news to you, then you probably should know more about filing requirements for U.S. persons abroad.

However, if you are a U.S. expat who is aware of their tax obligations, then you probably heard about FEIE. It stands for Foreign Earned Income Exclusion. It allows you to exclude up to $104,100 for 2018 tax year from your taxable income. But in order to qualify for such exclusion, you need to meet requirements. One of them is to pass either Bona Fide Residence Test or Physical Presence Test.

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U.S. Expatriates Offshore Banking: Best Countries For Overseas Banks

Olivier Wagner, Best Banks For U.S. Expatriates, Expatriate Tax Advisor

We are regularly asked about expat offshore banking, best overseas countries, and banks for US citizens. It’s a well-known fact that a right bank can save money for US citizens traveling or living abroad. Many Americans abroad are looking into ways to invest through financial institutions. It can be either in their place of residence, in popular financial city centers or in offshore destinations. When choosing a bank, everyone usually pays attention to following criteria:

  • ease of opening,
  • Investment access and liquidity,
  • taxes,
  • asset protection,
  • foreign transaction fees,
  • exchange rate used to convert foreign transactions to USD,
  • wire transfer charges,
  • customer service etc.

Read further if you want to learn more about opening an overseas bank account as an American abroad.

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How To Qualify For The Physical Presence Test To Use Foreign Earned Income Exclusion

Olivier Wagner, Tax Expatriate Tax Preparer

U.S. expats can use the Foreign Earned Income Exclusion to reduce taxable income. And if you did you research on this topic, then you probably heard about tests to pass. American abroad has to qualify for one of the two tests. Today we explain what you need to pass the Physical Presence Test.

Let’s take another look at few general requirements to use FEIE:

  • You should have foreign earned income
  • Your tax home must be in a foreign country
  • and one must qualify for one of the two tests, either Bona Fide Residence or the Physical Presence Test.

The IRS states that a U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months qualifies for the Physical Presence Test, but is it really that simple?

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What Is A Foreign Earned Income For U.S. Expats?

Olivier Wagner, Foreign earned Income For Expats

Do you want to take advantage of the Foreign Earned Income Exclusion, the Foreign Housing Exclusion or the Foreign Housing Deduction? As a U.S. citizen or Green Card Holder living abroad, you still need to file annual U.S. federal tax returns. There are many different options, which American abroad has in order to cut the tax bill. However, the 3 above-mentioned ones are based on Foreign Earned Income.

So what is a Foreign Earned Income?

It’s crucial to understand what FEI is for US expats. We prepared this easy infographic to provide more clarity on this topic. The definition by the IRS states that it’s income you receive for services you perform in a foreign country:

Check out the infographic below to understand the classification of types of income and what is considered to be NOT earned income. We also included what the IRS doesn’t count as a Foreign Earned Income.

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U.S. Citizens Living And Working In Canada

In order to combat tax evasion, the United States has put in place many rules. Today we discuss the ones directed at US citizens investing outside the U.S. These are traps for many US citizens living in Canada, simply doing the sort of things that many Canadians normally do. While it is true that Canada is not a tax haven, these rules are often of general application. And the Canada-United States Tax Treaty supposedly should grant tax relief. But the truth is it does not provide much relief due to the overreaching application of the “savings clause”. It specifies that most of the tax treaty is not applicable to US citizens.

1. What does a U.S. citizen in Canada need to know about Passive Foreign Investment Companies (PFIC)?

The rules in question may apply to income or profits derived by a U.S. taxpayer who owns shares in a passive foreign investment company (PFIC). The PFICs are non-U.S. corporations that derive at least 75% of their gross revenue from passive sources or at least 50% of which is used to generate passive income.

When a U.S. taxpayer owns a minority interest in a PFIC, the income derived from those (or the profit on the sale of his shares of the corporation) are subject to punitive taxation regimes. Without making a timely election, that regime would be the excess distribution regime.

Under this regime, the excess distribution is determined by first computing the average amount of PFIC distributions for the previous three years. Distributions greater than 125% of this average is defined as “excess distributions” which are then allocated to the entire holding period in which the taxpayer owned the shares. Any income credited to a previous year is taxed retroactively to the highest marginal rate, and interest and penalties are applied until the current tax year.

Many Canadian mutual funds might be PFICs – the IRS issued little guidance on the topic, but in order to be sure to be compliant (as is the case when renouncing U.S. citizenship) one should file forms 8621 and pay the PFIC tax if applicable. We, therefore, recommend that U.S. citizens living in Canada carefully consider the PFIC issue before investing. 

Check out our client Robin’s story here to learn more about the ways to deal with PFIC.

2. What is an RRSP and how it affects your tax return?

The Registered Retirement Savings Plan (RRSP) is a Canadian program. They designed it to encourage retirement savings in two ways. First, the contributions paid are tax-deductible for the year. And the investment income earned on these contributions is taxable only at the time of their withdrawal.

However, the IRS does not routinely treat RRSPs as tax-deferred retirement savings accounts. By default, the IRS considers these plans as simple investment accounts. It means the increase is taxable as soon as it is realized. As well as you cannot grant a deduction for the deposits assigned to the account.

The Canada-U.S. Tax Convention provides some relief in this regard. Namely that the taxpayer can defer the taxation of investment income from his or her RRSP. He/she should attach Form 8891 to his or her tax return (Form 1040). Since 2014, the mere fact of not reporting income coming from the RRSP was to be treated as an irrevocable election to defer the income. However, RRSP contributions are not deductible from taxable income in the United States. As a result, the foreign tax credit may not fully offset the tax payable in the United States.

3. Last but not least: TFSA and RESP

Other accounts with favorable tax treatment in Canada can cause problems for U.S. citizens living in Canada. For example, the IRS treats Registered Education Savings Plans (RESPs) as trusts. Therefore they are subject to tax rules and regulations. And these rules have no equivalent in Canada. We, therefore, recommend that U.S. citizens avoid these products.

Tax-Free Savings Accounts (TFSAs)’s status is less clear. In many cases, they are not trusts. That said, their tax-free status doesn’t exist in the United States. Since you don’t pay tax to Canada, you cannot claim a foreign tax credit. Income accrued within the TFSA is taxable, but without a foreign tax credit to offset tax owing, it could lead to actual tax payable to the IRS. We also covered TFSA in details before.

Have a tax question? Contact Olivier Wagner.



U.S. Citizens Abroad: What Happens If I Do Not File?

Some Americans who go abroad have already been non-compliant for years before they ever get on a plane. Others figure that since they won’t be within US borders, it would be impossible or highly impractical for the US government to take any realistic measures toward collection. Before you decide to take this route, it’s a good idea to fully understand the consequences you might encounter if you fail to file.

The first thing to understand is that anything you owe the U.S. that you don’t pay while living overseas is subject to 3.25% interest. Though imprisonment is unlikely, you could face fines. Nonpayment of taxes can not only hurt your finances, but your travel plans as well.

How do expatriates become compliant with the US tax system? The 1040 isn’t the only form you need to file. Many activities that seem benign would trigger specific filing requirements, and you may have to file these forms as well. The rules are the same for Americans living in the US, but Americans living abroad are much more likely to have these “foreign” activities.

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How Do I Qualify For Foreign Earned Income Exclusion?

To claim the foreign earned income exclusion, you must meet all three of the following requirements:

  1. Your tax home must be in a foreign country
  2. You must have foreign earned income
  3. You must be one of the following:
  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect, and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

There are only two of the factors to be considered in determining whether you pass the bona fide residence test: the length of your stay and the nature of your job. You need to remember that you do not automatically acquire bona fide resident status just by living in a foreign country or countries for one year and your bona fide residence is not necessarily the same as your domicile. If you made a statement to local authorities in your residence country that you are not a resident of that country, and they determine you are not subject to their income tax laws as a resident, you can’t be considered a bona fide resident.

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