Expatriate Foreign Income – Are you required to File?
In most cases, yes.
If you are a US Citizen or Permanent Resident living outside of the US (also known as an expatriate), you are required to file US Federal and State Tax Returns and report all of your global income, just as if you were living within the United States.
If your income and your non-US assets are below certain thresholds, however, then you may not have to file. The income threshholds can be found here (IRS Pub 501, page 2).
Asset thresholds, however, can be a lot more complicated. There are also filing requirements for ownership and/or authority over non-US corporations, partnerships, and trusts.
Receiving a gift form a non-US person may trigger a filing requirement too.
Disclaimer: Taxes for expats living abroad are extremely complex. We insist that your best bet is to hire a tax professional who specializes in these tax returns. There are so many unique situations that can lead to penalties and more taxes. This guide is very general and does not replace the IRS publications on how to stay compliant with your taxes.
Do Expatriates Pay Tax on Foreign Income?
It depends. Policy makers wrote tax laws to protect US Expatriate Citizens and Residents working abroad to where they will not have to pay any more tax than as if they were living in the US and earning income.
In many cases, expatriates won’t have to pay any tax to the US even when taxed at a lower rate abroad.
There are two major area of relief for expatriates in the tax code – the Foreign Earned Income Exclusion and the Foreign Tax Credit.
To put it simply, if you pay tax to a foreign country (most countries), and it works out to be the same or more as your tax would have been in the United States (which is most often the case), then you will not end up owing any tax at all to the United States. This is by claiming the foreign tax credit.
Also, expatriates might also qualify for the foreign income exclusion, in which you can exclude all or much of your earned income from being taxed.
Remember though, you still have to file a US Tax Return if your income are above the standard thresholds to claim this relief.
What if an Expatriate Does Not File On Time?
This could end up being a big mistake. The foreign earned income exclusion is actually considered an election. The ability for an expatriate to elect exclusion of income from being taxed expires one year after the normal due date of the return.
Does this mean you will owe taxes if you just realized you should have been filing all of these years?
No, not usually. Tax code policy makers have been understanding that many expatriate tax payers working abroad have not been aware of the filing rules.
The code was written as such that if it turns out you didn’t owe tax had you made the election on time, then they will let you slide on the election expiration requirement.
Furthermore, the IRS (in many cases) has gone further with the relief and has often interpreted the code to mean that as long as they have not “gone after you” – they will give you a break on the election expiration even if you owe tax. So filing voluntarily, before you get a notice, can be very beneficial to expatriates.
Still, you never know when they might start enforcing the law more strictly, so it’s always a good idea to stay right on time with your foreign earned income filing.
Will the IRS “Find Out?”
They are tying harder and harder lately to enforce these expatriate filing requirements, so it is likely. In 2014, the US entered into treaties with many countries to trade information on “who” is working “where” and “who” has money “where”.
Expatriate Amnesty Procedures
One nice thing that policy makers did, however, was to create a simple and streamlined process to help expatriates get up to date.
If you qualify under these procedural rules (by not actually owing any tax), you can file the 3 most recent tax returns that you have not been filing and they will likely give you grace on any penalties and filed returns prior to that.
This is a huge relief to those that have not been filing for years.
Rules for expatriate tax filing relief have been changing rapidly in recent years. For 2018, it’s easier than ever for an expatriate to get caught up on tax filing.
What’s This About an FBAR?
This is very important!
All you have to do is fill out and upload a simple informational return to let them know you have foreign accounts.
The scary part is, if an expatriate is innocently unaware of compliance on this requirement, they can be fined $10,000 per occurrence.
Worse is that if you intentionally do not file this simple form, they can fine you up to $100,000 or more in some cases.
The US Government has also been lenient on expatriates who have unknowingly failed to file FBAR returns. Again, the key for an expatriate to avoid penalty is to file them before they are contacted for being delinquent.
Anyway the FBAR Tax Return is separate to the Federal Income Tax Return. The website to download, fill out, and upload the form can be found here. Please do not blow this off and let us know if you have any questions. I will prepare and e-file you FBAR for you if you wish.
Can You Elect the Foreign Income Exclusion?
It depends. One of the requirements to qualify for the exclusion is that you pass either a physical presence test or a bone-fide resident test. Both require that you are an expatriate (working and living in the foreign country for a significant portion of the year).
If you can’t take the Foreign Income Exclusion you can probably take the Foreign tax Credit. One or the other may work out to result in the least tax liability for you.
We recommend that you have an expatriate tax expert prepare your taxes when you have foreign income. There is just so much room for mistakes to occur.