Things to Consider before Venturing Abroad
By Michael Kaplanidis, CPA, Water Street Associates
Working abroad can be exciting and financially rewarding, especially during our current economic climate. Before agreeing to an overseas assignment with a current or prospective employer, here is a list of things that you should consider:
1. Federal and State tax filing requirements As a U.S. Citizen or resident alien of the United States, you’re taxed on your worldwide income. What does this mean? Working abroad neither precludes you from filing a U.S. Income tax return nor paying income tax. While the IRS extends the filing due date by two months (June 15th) and provides a Foreign Earned Income Exclusion (approx. $91,500 in 2010) to qualified individuals, you’re still required to report your worldwide income on your Federal tax return. State filing requirements for individuals are based on each respective States’ and individual’s domicile or legal residency status and general filing requirements.Massachusetts’ domicile and legal residency status depends on all facts and circumstances for each individual. According to the Mass residency status rules, “an individual cannot choose to make his home one place and for the general purposes of life and in another for tax purposes. One’s legal residence is usually the place where an individual maintains the most important family, social and political and religious ties”. A person’s intent will be subject to close examination if he/she claims a change in domicile status. Here’s a list of factors to that helps determine filing status:
a. Purchased or leased new home or apartment in new location
b. Do you maintain a permanent place of abode in Mass?
c. Moved all personal property to new location
d. Obtained permanent employment in new location
e. Cancelled Mass bank account and opened new accounts in new location
f. Sold property or canceled leases, which are located in Mass
g. Issued an address change notice
h. Changed voter registration status
i. Obtained a driver’s license and auto registration (if applicable) in new location
j. Changed membership in churches and clubs
Moral to this story…Please review your states’ filing status rule to determine filing requirements. Just because you’re working abroad, doesn’t mean that you’re not required to file a state income tax return.
2. Maintaining well organized travel records, which will help you qualify under the Physical Presence Test (330 full days present in foreign country)
3. Housing allowance paid on your behalf by your employer for services that you’ve performed is treated as foreign source income
4. Social Security tax withholding requirements if you’re strictly working for a foreign government or foreign corporation without U.S. ties. As US citizens or resident aliens that are directly working with foreign governments or foreign entities without US ties are not required to pay social security tax on foreign earned income
5. Foreign financial account disclosure requirements….Foreign Bank Account Reporting (FBAR) and Foreign Account Tax Compliance Act (FATCA) increase the disclosure complexity on reporting foreign assets and foreign investments. Taxpayers with foreign accounts that don’t file the necessary disclosure forms will be subject to stiffer penalties and the possibility of criminal prosecution. Here’s a quick guideline to determine if you subject to the disclosure rules:
FABR Rules: Requires US individuals with financial interest in or signature authority over a foreign financial account(s) with an aggregate value of $10,000 at any time during a calendar year must file TD F 90-22.1 by June 30th of the following year. While electronically filing Form TD F 90-22.1 may be available in the future, currently it’s not an option.
Non-Disclosure Penalties: A US individual who fails to properly file may be subject to a penalty of not more than $10,000 per violation. Furthermore, willful failure to report foreign accounts is subject to a harsher penalty equal to the greater of $100,000 or 50% of the total account balance of the foreign account per violation. Willful violations, if proven, may also be subject to criminal penalties under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. section 1001.
FATCA Rules: The Foreign Account Tax Compliance Act applies to assets held during tax years beginning March 18, 2010. The FATCA reporting requirements are much broader than FABR, creating the possibility of filing Form 8938 and not Form TD 90-22.1.
Reportable Assets: The following are specified foreign financial assets that would require a taxpayer to file Form 8938 if the assets exceed a certain threshold.
1. Stock or securities issued by a foreign corporation
2. Interest in foreign entity
3. Depository, custodial, or other financial account maintained by foreign financial institution
4. Any financial interest or contract held for investment that has a non-US issuer or counterparty
As you can see, reportable assets are much broader than those covered by the FABR rules. Furthermore, assuming that one has a filing obligation based on FATCA rules, Form 8938 must be attached to a taxpayers 1040 tax return beginning with their 2011 tax year.
Who must file: The following individuals with specified foreign financial assets must file Form 8938 with their tax returns:
1. U.S. Citizens;
2. Permanent Residents (i.e. green card holders);
3. Individuals satisfying the substantially presence test;
4. Non-resident aliens making an election to file a joint tax return with a U.S. spouse
Valuation Threshold: Specified foreign financial assets with values that exceed either/or of the following thresholds create a filing obligation:
Either/Or
Penalties: Penalties are harsh and should not be overlooked.
1. Failure-to-File: Subject to a penalty of $10,000 with a maximum penalty of $50,000. The penalty increases by $10,000 for each 30-day period following IRS notification for failure to file Form 8938 within the 90 days after IRS response. For married filing joint taxpayers who fail to disclose their significant foreign assets, the failure to file penalty applies as if you each was a single person (penalty doubles).
2. Accuracy Related Penalty: If taxpayer underpays tax as a result of an undisclosed specified foreign financial asset, the deficiency is subject to a 40% penalty.
3. Fraud: If the taxpayer underpays tax on account of fraud, the underpayment is subject to a 75% penalty.
Michael Kaplanidis, CPA, is the Founder and Managing Director of Water Street Associates, a tax preparation company that offers personalized service to individuals and businesses, specializing in expatriate tax returns. The company also offers the Taxes at Work&™ program for employers, a unique no-cost HR benefit that reduces stress, saves time and increases employee productivity.
** While FATCA regulations have not yet been finalized, it’s worth noting the significance of not reporting foreign financial assets. We will be sending an update as soon as regulations are finalized – expected by year end.