Guest post by John Ohe, IRS Enrolled Agent and chartered Financial Analyst.
American expats are subject to U.S. income taxes regardless of where they live and where they make their income. For tax year ending 2013, individuals with income over $10,000 USD (see chart below) must file a federal tax return. However, self-employed people have a much lower threshold. They are obligated to file a tax return if they have $400 USD or more in earnings.
Over the past few years, the IRS has been increasing its scrutiny over U.S. expats. As such, “better safe than sorry” is fast becoming an applicable quote if you are an American citizen living outside the United States. Note that there are penalties for not filing.
For many people, a trip to the dentist is preferable to preparing a tax return. The good news, however, is that many U.S. expats end up not owing taxes because of certain exclusions and credits available to the expat community. The most important of these are the foreign earned income exclusion (FEIE) and foreign tax credit. With the FEIE, up to $97,600 of foreign earned income while living abroad is excludable from federal tax. The $97,600 USD works in conjunction with other deductions. As a result, one can have more than $100,000 USD in income, and pay no taxes. With a working spouse, the excludable amount is doubled. In order to qualify for the FEIE, one must meet be either the bona fide residence or physical presence test. With the foreign tax credit, taxes that are paid to a foreign country offset U.S. tax liabilities. The foreign tax credit is normally utilized when one has paid income tax to a country with a higher tax rate than that of the U.S.
On a very practical note: many people with modest income do not file tax returns (e.g., not required to file because their income falls below the dollar thresholds). However, they are losing out on valuable tax credits that are fully refundable. For example, the Child Tax Credit is worth up to $1,000 USD per child. There is a good chance of qualifying for this credit (if you have a child under the age of 17 that is a dependent) as long as earned income is at least $3,000 USD.
Lastly, the U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. The FBAR (Foreign Bank Account Report) is one of the key reporting requirements that Uncle Sam utilizes in its monitoring efforts. FATCA (Foreign Account Tax Compliant Act) is a second and distinct requirement. U.S. expats often get these two confused with one another. With the FBAR, the reporting threshold is met if the aggregate balance (combining all the accounts) exceeds $10,000 USD at any point during the year. The second report is Form 8938 (FATCA). The threshold is much higher. For expats filing an individual tax return, it is $200,000 USD aggregate balance on the last day of the year, or $300,000 aggregate balance at any point during the year. For expats who are married filing jointly, the threshold is double.
The penalties for failing to disclose are onerous. With the FinCen 114, failure to report carries a penalty up to $10,000 USD. Willful non-compliance potentially raises the penalty up to $100,000 or 50% of the taxpayer’s foreign assets (whichever is greater). With FATCA, The maximum penalty for failing to file Form 8938 is $60,000 USD for each foreign asset that you failed to report (even more onerous than for the FBAR).
If you would like to submit a tax-related question, please visit us: HolaExpat.com .
All responses are provided by John Ohe (IRS Enrolled Agent and Chartered Financial Analyst).
Hola Expat helps Americans living abroad with their U.S. tax returns. Our professionals are IRS Enrolled Agents with expertise in expatriate tax return matters. Take a look at our fee schedule. We offer the most sensible pricing among our competitors.
Disclaimer: The answers provided in this article are for general information, and should not be construed as personal tax advice. Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved.