Tax filing has officially ended last April 18. But if you are an expat or resident alien living and working overseas, you have until June 15 to comply with the IRS and file your taxes.
Most expats or resident aliens be under the impression that moving out of the US entails freedom from any tax obligations. But the reality of it is, foreign income of any US citizen is still subject to US tax regardless of current residency and even after paying tax to the host country. In fact, US is one of the few countries in the world that taxes its overseas citizens.
According to the Internal Revenue Service (IRS), an expat or resident alien living abroad still have to comply with the federal income tax return of the US. The rules and regulations of tax filing for expats and resident aliens are also the same as the rules and regulations applied to citizens within the US border.
To help you get your tax obligation sorted, here are 8 essential things to help every expat or resident alien taxpayer.
8 Essential Tips
1) Automatic Extension – Expats and resident aliens are given an automatic 2-month extension (June 15) even without filing an extension form (unlike regular US citizens who must file a form for extension on or before the tax deadline).
If however an expat or resident alien is still unable to file his/her return even with the automatic 2-month extension, an additional extension can be requested through Form 4868 (Application for Automatic Extension of Time to File US Individual Income Tax Return) with October 15 as the new extended deadline. The form must be filed before the 2-month extension ends.
But even if the expat or resident alien qualifies for any of the aforementioned extension, he/she must still pay the Interest incurred for not paying the tax amount during the April 18 deadline.
2). Tax Exclusion – In accordance with the Foreign Earned Income Exclusion, an expat or resident alien can be exempted from US tax obligation only for income of $101,300 and below. If the income goes beyond the limit, the difference will be the only amount subject to tax. For instance, your income is $125,000, $23,700 will be the only amount subject to US tax.
However, the IRS Form 1040 must be filed and the expat or resident alien must pass the Bona Fide Residence Test or Physical Appearance Test in order to claim the exclusion.
The exclusion can be revoked if the expat or resident alien is living in the country with no functioning government or visited the country for more than 35 days.
3) Lower Tax – When an expat or resident alien pays tax to the US and host country, that is considered double taxation. In such situation, Foreign Tax Credit can be claimed. Foreign Tax Credit allows the expat or resident alien to pay only the higher amount of the two tax rates.
4) Currency Conversion – When filing your tax, always remember to express each of the taxable amount to US dollar even if the income received is in foreign currency. The Yearly Average Currency Exchange Rate is the standard rate to be used in reporting foreign income earned. However, for income received on a specific day, amounts must be converted on the exchange rate specified during the day.
5) IRS Penalty – Any US citizen with one or more financial account with more than $10,000 in balance (single account or combined account) must report the Foreign Bank and FInancial Accounts (FBAR) to the IRS.
Failure to report such foreign account/s may lead to a $10,000 penalty for undisclosed foreign accounts even if they aren’t subject to US tax. Similarly, a recently implemented provision by the Congress allows the IRS and the State Department to revoke the passports of expats and alien residents with tax debt of $50,000 and more.
6) More Than Just The Income – To ensure that all expats and alien residents are complying with their tax obligations, the IRS have enforced a new rule where expats and alien residents must also report additional information on savings and investments.
7) Unfiled Tax Returns– For expats and alien residents who failed to file their federal income tax for several years, the IRS is offering a streamlined procedure for delinquent taxpayers. The procedure allows expat or alien resident taxpayers to pay a minimum of three years of tax filing and six years or FBAR without incurring any penalties.
8) Comply with FATCA – Foreign Account Tax Compliance Act or FATCA requires US expats to report any foreign financial assets which may vary depending on the residency and filing status. Financial institutions are required to report all the accounts of their US clients. Penalties for non-compliance are very costly so better include all foreign financial assets before your bank does.
It is part of every US citizens’ due diligence to comply with the federal income tax return regardless of current domicile. It’s no secret that penalties for non-compliance is very steep so be sure to know the applicable tax laws for expats in the US as well as those applicable to the country you are travelling to or residing in. Furthermore, always file your taxes on time and be sure to include every taxable income in your tax return to avoid any unprecedented disputes with the IRS and tax delinquency.