No matter where expats decide to work or retire, they still have tax obligations but there are ways to mitigate these. While most of this article is aimed at US expats, there will be tips and ideas that every expat can learn from.
There are more than nine million American citizens living overseas and they are required by law to file an Internal Revenue Service income tax return.Tip 1
Find a specialist. It seems like such a simple recommendation but many people decide to go it alone when it comes to filing income tax returns. In doing so, they may miss ways of saving money. Most tax specialists should be able to save their clients more than they get paid.
It’s also important to appreciate the double tax agreements that many countries have so that expats do not pay income tax twice.
Some US expats may believe that while they are living and working overseas they do not need to file an income tax return but this is a mistake. Around half of US expats fail to file.
While the US tax filing system may appear daunting to American citizens living overseas, finding a tax specialist will help. US expats should be organised and document everything they earn and spend. They will also need to keep accurate records of travel and time spent in a foreign country.
Tip 2
Understand the rules. Again, this is another simple recommendation but many people do not bother to read the rules when it comes to filing a tax return. Spending a few moments understanding what is needed and what needs to be filed could pay dividends.
Again, the double tax arrangements will come under this heading and expats need to know what tax treaties are in place to ensure they are taxed correctly. US expats also need to find out whether their health benefits will be considered as taxable income, for instance, though this does vary between countries.
Tip 3
Remember your deductions. For US expats in particular, they can deduct various expenses and costs from the federal tax form and this also extends to other expats from other countries.
US expats who fail to file a return every year should appreciate that while the financial filing thresholds are low, they will probably not owe any taxes because of the deductions they can make to their return.
For example, by utilising the Foreign Tax Credit they can offset their US taxes against the taxes they pay in another country; a US expat may owe $10,000 in US taxes but they may work and live in the UK where they have paid $15,000 in tax. This tax payment will offset their US tax bill because it exceeds the US tax demand.
Speak with a specialist US tax adviser as it’s possible that the $5,000 difference, or a part of it, can also be claimed to offset a future US tax bill too.
Tip 4
State taxes should not be forgotten. American citizens are still liable to pay state taxes and these should not be forgotten when filing a tax return. Some states do not impose a tax on expats as they appreciate they are not receiving services they are paying for.
Tax experts say US expats should have an American mailing address for this reason and should be aware that states have powers to reclaim what they are owed should an expat receive a federal tax refund.
Tip 5
Is it worth being a US citizen? There’s a growing trend for US expats to give up their citizenship with many more considering whether it’s worthwhile to retain their US citizenship.
This will mean undertaking an analysis of all the expat’s assets including non-financial and financial as well as those being held overseas and in the US since if it’s a substantial sum, for example more than $2 million, then it may be worthwhile speaking with a specialist tax adviser.
However, US expats also should know that giving up their citizenship is an irreversible decision.
Tip 6
Claim your Foreign Earned Income Exclusion. One of the main reasons expats head overseas for work purposes is to boost their income and save up a substantial sum. They should know they can exclude from their return up to $100,800 of their foreign earned income from being taxed in the US (numbers accurate at the time of writing).
The criteria are quite strict and require US expats to be living overseas for 330 days in any 365 days period. There’s also a residence test for those who permanently settle overseas, though again, a specialist tax adviser will be able to give more details.
It should go without saying that US expats returning to America need to track their time accurately and the requirement is for a ‘full day’ spent inside a foreign country and not travelling to and from the US. It’s also possible to file for an extension if the US expat has spent long enough overseas to qualify under the Foreign Earned Income Exclusion criteria.
Tip 7
Never forget. Apparently, there are millions of Americans who do not realise the need to file a US tax return and many are years behind. It’s never too late for a US taxpayer to catch up and it is an issue that should not be ignored once the taxpayer realises they are behind. For US expats there is the ‘Streamlined Offshore Filing Procedures’ to help those who have been left behind. The IRS is unlikely to impose FBAR and late filing penalties.
Tip 8
Always file. It’s crucial that US expats file their tax returns on time and while the dates changed in 2016, the filing dates in 2017 will be similar to those in previous years. There’s also a process that makes it easy to access for a taxpayer to delay filing but they need to request permission to do so.
Essentially, all US citizens, including green card holders, need to file a tax return regardless of where they live in the world if they earn more than $10,000 every year. Expats who also have assets worth more than $200,000 overseas have to file additional information.
All US citizens with at least $10,000 in at least one foreign-held financial account in a tax year must declare this under FBAR – the foreign account report.
Tip 9
Do not overpay. Many Americans err on the side of caution and pay more tax than they owe while working and living overseas. For instance, they should know that if their employer is a foreign company then they don’t have to pay US social security taxes.
Americans have an obligation to file, and it’s important that they do, even if they are paying taxes in the country where they are living, because this is what the law demands. Failure to file will lead to penalties. With some professional tax advice and staying organised, the US expat could and should avoid lots of trouble.
Tip 10
Pay your tax. It’s important that US expats pay their tax bill on time and there are now many ways for them to do so including by electronic funds transfer, cash and credit cards. Some US expats will be in the fortunate position of being owed money by the IRS so the sooner they file their return, the sooner they will receive their refund.
If the taxpayer owes money to the IRS they should pay as soon as possible to prevent penalties and interest charges being added to the amount. Those who cannot pay their tax bill in full should pay as much as they can afford to in order to help minimise interest charges and penalties.
It’s also possible to request an extension to the payment deadline or to agree to pay the tax bill in instalments. It’s possible to add an extra 60 to 120 days to the deadline without having to pay an extra fee but they may face the risk of late payment penalties plus interest on the outstanding amount.
Expats from some countries may have to inform their tax authority – for instance in the UK that would be HM Revenue and Customs – that they are moving abroad for work purposes. Failure to notify may lead to the expat not being exempt from all taxes and they may have to pay extra ones too.
All expats should also do some element of tax planning since they may be earning interest on savings, for instance, and they will also want to avoid paying income tax in two countries.
The other issue that expats, and US expats in particular, face is that they should not be looking to hide. The taxman will eventually find them and they will be handed a tax bill for monies the tax authorities believe the expat will owe. It’s best to take the time to arrange tax affairs accordingly. That will ensure that a lucrative and enjoyable spell working overseas is not spoiled with an encounter with the taxman.
The issue for US expats is that America is the only country that taxes its people no matter where they are living and the several million American expats living overseas who do not file their returns are probably hoping that the IRS will not find them.
However, to help the IRS, the US government introduced the FATCA law in 2014 which targets US citizens who hold foreign bank accounts. The bank itself has to declare the US citizen is a client or face punitive costs for failing to do so. This is one of the big reasons why US expats may struggle to find a bank willing to take them on as a client overseas.
Important that expats understand and appreciate the tax arrangements
It’s also important that expats understand and appreciate the tax arrangements in the country where they are living and working since these will vary between countries and rules will differ.
This article has touched upon a few issues but the main piece of advice is that all taxpayers should file a tax return if only for the simple reason that they are in the system and the IRS appreciates their current financial situation – even if they do not earn enough for filing purposes.
People living overseas who believe they do not have to file because they do not live in the US run the risk of having their finances audited. The IRS audits a certain number of taxpayers every year and many will find the process intrusive.
The IRS can audit a taxpayer at any time and the threshold has been extended to six years so expats need to maintain their financial records accurately, not only for filing correctly but also in case they are audited.
The upside to filing for expats is that they have access to more credits and deductions from their tax bill than the vast majority of taxpayers in the US. Among them are expenses for running a business while overseas, for example, the expat may be working from home and they can claim some of these costs.
Publicity about citizens filing their tax returns
Despite the warnings and the publicity about citizens filing their tax returns on time, it’s on public record that growing numbers of US citizens who live abroad are failing to provide a tax return and that tax delinquency is becoming worse.
However, for tax delinquent expats from this year, the IRS has a new tool that taxpayers should focus on since if their tax delinquency passes the $50,000 threshold then they could, potentially, have their passport cancelled. That is a very strong sanction to impose on someone who has consistently failed to file returns and the ramifications for losing US citizenship could be profound.
The bottom line is that the US government is taking huge steps to find US expats not paying their taxes and make them file returns by gathering information from tax authorities and financial institutions around the world; it’s becoming harder to hide from the IRS (and most other tax authorities too) so it just makes life simpler to file a return and pay any taxes due.