Tuesday, August 21, 2012

Basic Overview of US Expatriate Tax Requirements

The following is a guest post by I.J. Zemelman, EA. Tax Operations Director at Taxes for Expats              
Bottom Line:  File Your Taxes Every Year
As a US expatriate working overseas you must file your US federal taxes annually just as you would if you were living in the United States.  Why?  Because your total world income determines your tax liability – not simply the income you receive in the states.  As an American expatriate, though, you have more tax saving options than those with a stateside residence such as housing and subsistence allowance, income exclusions, foreign tax credits, and more.  Savvy taxpayers who’ve taken the time to research additional deductions and savings opportunities or who work with a tax professional may have access to even more options.  Let’s refer back to the bottom line, though:  If you don’t file your taxes you don’t qualify for such deductions and exclusions. There are lots of tax guides out there designed to help you.

How to qualify for FEIE (Foreign Earned Income Exclusion)?
In order to qualify for the Foreign Earned Income Exclusion on Form 2225 or Form 2555-EZ you only have to be a resident of another country and file your taxes in said country.  Married couples who both live overseas may file jointly.

A number of taxpayers are unclear as to what income qualifies for exclusion, and the answer is simple:  Only income earned as an employee or contractor.  Any monetary gain from dividends, interest, rental income, and other types of investment returns are not excludable from your US tax liability.  The last update to the amount US expats were able to claim as exclusion is $92,900 for 2011 and $95,100 for 2012.

Another definition it’s important to take a look at is exactly what constitutes foreign.  For IRS taxation purposes, foreign income is viewed as any income received outside of the United States or any US Territory, which include American Samoa, Guam, Micronesia, Northern Mariana Islands, Puerto Rico, and the Republic of Marshall Islands.

Before you can claim FEIE there are certain additional requirements you must meet; you will be required to have lived in a foreign country for a full year, or at least a minimum of 330 days out of a 12 month period.

Information on Foreign Tax Credits?
Tax treaties with the United States ensure that you will be not taxed twice by 2 countries for the same income.  In order to ensure you receive your foreign tax credits you must file Form 1116 if you are an individual and Form 1118 if you are a corporation.  If you still owe anything to the United States after having applied your credits, the total amount you owe should be very low.

While tax treaties are great for saving international taxpayers money, there are a few important rules and exceptions of which you should be aware:
  • Travelling Restrictions:  Some treaties become ineffective if the taxpayer travelled to a country with restrictions such as Cuba.  It is important for you to check with the State Department before travelling.
  • Tax Home:  If you are involved in a civil unrest you may qualify for an exception which allows you to claim your overseas residence as a tax home.
Note: There are a variety of other rules included in international tax treaties such as those regarding the IRS auditing process.  Filing any return begins the 3 year backtracking period to which an IRS agent can perform an audit – including international returns or returns with no taxable income.

Keep in mind that it will not behoove you to try to give false information to the IRS, as quite a few countries including Barbados, Colombia, Dominican Republic, Honduras, Jamaica, México, Trinidad, and many more have active information exchange agreements in place with the US.

If you are living overseas and you are self-employed you will be subject to all US income and SE taxes just as you would if you were living stateside.  It is important to be aware that foreign income credits CANNOT be used to decrease your SE tax liability. 

You will be protected, however, along the lines of Medicare and Social Security contributions.  The US has what is known as Totalization Agreements with multiple countries which prevent a taxpayer from having to pay into 2 social insurance systems.

Timing is Critical
American expats who are known to be working overseas or who can prove their income originated overseas will be automatically granted a filing extension to June 15th instead of April 15th.  Both military members and civilians working on overseas assignments qualify for this automatic extension. See our complete list of US Tax Deadlines for expats for more information.

Expats are also able to request a further extension and not be required to file taxes until October 15th.  This extension, however, is only for filing.  If you are an American expatriate and you owe taxes which aren’t paid by June 15th you will most likely be subject to penalties and interest.  If you are unable to pay before October you may be able to minimize your penalties by filing Form 2210.

The article is merely an overview of an overwhelming amount of US expat tax information. For additional help, please contact the experts at Taxes for Expats today or read more about taxes at these tax guides.
I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887
Email: questions@taxesforexpats.com


Friday, August 10, 2012

What If I Can't Afford to Pay My US Expat Taxes?

The following is a guest post by I.J. Zemelman, EA. Tax Operations Director at Taxes for Expats                                 
If you are in a position in which you owe an excessive amount to the IRS from your US expat tax return there are a number of options that may be able to help.  Expat tax filing requirements are some of the most confusing of all, and quite a few expatriates encounter a tax burden from such confusion that seems insurmountable. There are lots of tax guides out there designed to help you.

Most of these situations stem from an expatriate’s lack of knowledge of reporting obligations, available exclusions and deductions, or a failure to file US expat taxes altogether.  Despite the circumstances which have led you to a precarious situation with your tax liability, the IRS understands of the difficulties expats face in filing their taxes, and there are a number of tax payment assistance options available to ensure that all tax obligations are met without bankrupting the taxpayer.

In this article we will take a look at some of the options available to you and how to take advantage of them.

Monthly Installment Plans

If there is no way for you to pay the entire balance of your tax liability to the IRS upon filing your US expat tax return you may be able to set up a monthly installment plan with the IRS.  The important words to recognize here, though, are ‘no way to pay.’  To the IRS, this does not simply mean that you don’t have cash on hand.  Before requesting an installment plan the IRS will want to see that you have sought out other means of coming up with the cash such as applying for a loan, liquidating your assets, applying for credit cards or lines of credit with high availability, or other means. 

If you have exhausted your possibilities and are unable to pay the IRS you may apply for an installment plan by filling out and submitting Form 9465.  If your proposed installment plan will exceed 120 days you will not be charged a fee for establishing such a plan, but there may be a setup fee if you plan to square away your debt in less time.  Note that the IRS will not accept monthly payments lower than $25.

Delayed US Expat Tax Due Date

Tax deadlines don’t always coincide with the most fruitful time of year for expats.  There are many US expat taxpayers who will have no problem meeting their tax obligations in a matter of a few months but are not in a position to pay at the time of filing.  In this case, the IRS may agree to extend the due date on your liability, but it is not free of contingencies.  In an effort to protect its financial interest the IRS will most likely file a Federal Tax Lien Notice against you until you have satisfied your debt.  If your plan of coming up with the money involves assistance or transactions with a financial institution, this lien may cause a number of problems in the execution of your plans.

While this may be one of the most desirable tax solutions to expats who can’t afford to pay their total tax liability, the IRS prefers it to be the last resort of a taxpayer.  On offer-in-compromise (also referred to as OIC) is an agreement between the IRS and a qualified taxpayer in which the IRS accepts an amount lower than the actual tax liability due.  In order for an OIC to be approved the IRS must be convinced that the taxpayer will not be able to satisfy his/her debt by any means now or in the future with an extended payment arrangement.  In order to ensure this isn’t the first option sought by taxpayers the IRS assesses a $150 fee for the evaluation of any OIC.  If you feel as though you owe the IRS more than you can possibly ever pay, you may apply for an OIC by filling out and submitting OIC Form 433-1.

Assistance with US Expat Taxes
There are a variety of programs for which expat taxpayers may qualify, and it can be quite exhausting reviewing your options and the qualification criteria.  Every taxpayer’s situation is unique, and identifying the most beneficial option isn’t always an easy task.  You can simplify the process by discussing your situation with an expat tax professional that is equipped with both knowledge and experience in determining the best course of action to take.

The most important thing to remember is that you have options.  If you ignore the problem and simply do not pay without communicating with the IRS you will find yourself in a much worse position with large penalties and a potential prison sentence. Be sure to consult tax guides or expat tax accountants who could help you.

I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887
Email: questions@taxesforexpats.com


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