United States is one of the few countries in the world in its Citizen-Based-Taxation format. This means that no matter where you live, you need to be current on your U.S. tax filing if you are a U.S. Citizen or Green Card Holder. You are known as an Expatriate or Expat (for short) if you are a U.S. citizen or green card holder living outside the United States.
Many such expats may have a simple tax return and accomplish their tax filing requirement with over-the-counter software. Of late however, I have seen many expats who come to see us because they have made a mistake and overpaid taxes to the U.S. government or have been ignorant of certain Tax Treaty provisions that would have been beneficial to them financially.
The complexity of these rules and regulations increases if your stay abroad is longer and you have investments in your resident country such as being in business for yourself/ being in a partnership or a stock-holder/director in a foreign company.
I have put together some of the most common mistakes expats make and hope this list helps you avoid these pitfalls.
Here is the first set in what will be an extensive multi-part series–SO WATCH FOR FUTURE ARTICLES!
1. Not Filing Your Taxes: Believe it or not, many expats do not know that they have to continue file their U.S. taxes even if they moved out of the country. The U.S. tax rules and regulations grant the Foreign Earned Income Exclusion (FEIE) to those who earn a salary or you can claim a Foreign Tax Credit for taxes paid on income earned in the resident country. In order to be able to claim these exclusions or credits, one has to file a tax return!
2. Not paying estimated taxes: After the foreign earned income exclusion and application of foreign tax credits, you may still owe taxes on the U.S. tax return. If you do not get a W-2 and no taxes are withheld at source on your income, one must pay estimated taxes every quarter. These are usually due April 15th, June 15th, September 15th and December 31st of every year. There are penalties for non-payment of these quarterlies. One must pay 100% of your prior year taxes or 90% of your current year tax.
3. Ignoring FATCA and FBAR Filing requirements: The Foreign Account Tax Compliance Act was enacted to prevent U.S. citizens and green-card holders from avoiding tax income earned from foreign investments. I cannot stress enough about the importance of being aware of the income thresholds that would apply to you based on your filing status and residency. The Foreign Bank Account Report, now known as FinCEN Form 114, is required if one has more than $10,000 in foreign bank and other foreign specified investments. The FATCA is one of the most complicated set of regulations in the U.S. tax regime and there are steep penalties for non-compliance.
4. Travel dates to and from the U.S.: If the Foreign Earned Income Exclusion is the only tax saving option for you, the most important number to remember is “330”. These are the number of “full days” or 24-hour periods that one has to be present in a foreign country out of 365 days to qualify for the Physical Presence Test to claim the FEIE. An error in calculation can lead to a loss in savings, so track this with extra care.
If you are an expat and find that some or all of the above apply to you, drop us an email or call us and we can take care of you.
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