Filing U.S. taxes can be particularly challenging for U.S. citizens living abroad. There are a number of unique tax rules that apply to U.S. expats, which are often misunderstood. The following are five of the most common mistakes made by U.S. expat taxpayers.
Mistake #1: I don’t need to file a U.S. tax return because I don’t live in the U.S. and I don’t owe U.S. taxes.
Perhaps the most widely held but mistaken belief among U.S. citizens living abroad is that they do not have a requirement to annually file a U.S. tax return. They often believe that since they are longer in the United States, their filing obligation terminates. This is simply not the case. The United States (and only one other country, Eritrea) taxes its citizens no matter where they reside – leaving the U.S. makes no difference in the eyes of Uncle Sam.
In many cases, U.S. expats may not owe taxes because of certain beneficial tax rules afforded to citizens living abroad. For instance, under the foreign earned income exclusion (“FEIE”), expats can exclude a certain amount of their income that is earned overseas (US $100,800 for the 2015 tax year). Foreign tax credits may also be available to reduce one’s U.S. tax obligation. These exemptions may eliminate the requirement to pay tax but they do not eliminate the obligation to file a tax return – in fact, in order to claim the foreign earned income exclusion or foreign tax credits, you actually need to file a tax return, and not filing on time may prevent you from being able to later make these claims on your return.
Mistake #2: None of my accounts has a balance of $10,000, therefore I’m not obligated to file the FBAR.
The Foreign Bank and Financial Account Report (“FBAR”) is a report on your financial accounts (e.g., bank accounts) that is not filed with the IRS, but rather with the Treasury Department through its online system. Any U.S. account holder (person or entity) with a financial interest in (or signature authority over) one or more foreign financial accounts, with more than US$ 10,000 in aggregate value in a calendar year, must file the FBAR for that year.
This means that if you have more than one financial account, you can pass the US$ 10,000 threshold even if you do not have that amount in any one particular account. When adding your balances together, accounts such as checking, savings, pension, cash value insurance policies, and other investment accounts need to be included.
Mistake #3: I do not need to file the FBAR because the foreign account is not in my name.
Unbeknownst to many expats, the rules regarding the FBAR are broad and far reaching. Very often U.S. expats believe that if a foreign account is not in their name or if it was funded by someone else, then they do not need to file the form. Unfortunately, this isn’t the case. In fact, even if an account is solely in the name of a non-U.S. spouse or relative, or in the name of a corporation, and your only connection with the account is the fact that you have the right to sign checks and withdraw from the account, you still have a requirement to file the form and include such account.
In a recent court case, a taxpayer argued that the IRS should not impose penalties for failing to file past FBARs because he mistakenly thought that since his foreign account was held in the name of his foreign corporation, he had no obligation to file. The court dismissed this argument, concluding that the taxpayer should have read the FBAR instructions, which clearly explain that the filing obligation can be triggered when a taxpayer owns more than 50 percent of the stock of a corporation that owns a foreign bank account.
Mistake #4: I can file late without penalties because I don’t owe taxes anyway.
It is true that if you file late you may not incur certain penalties that are calculated as a percentage of tax due. What many expats don’t realize is that you may incur other significant penalties that are fixed dollar amounts. For example, the penalty for an untimely filed FBAR can be US$ 10,000 per form per year. As further examples, a US$ 10,000 penalty may be applied for not timely filing the Form 8938 (Statement of Specified Foreign Financial Assets) or the Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) with your income tax return.
Late filers living abroad should consider utilizing one of the IRS amnesty programs to catch up with reduced penalties. Under the more lenient of the programs, the Streamlined Procedures, non-willfully delinquent filers can potentially catch up without incurring any penalties.
Mistake #5: I’m required to have U.S. health insurance or pay a penalty under the Obamacare rules.
Fortunately for expats, U.S. citizens who pass either the either the Physical Presence test (requiring presence in a foreign country for at least 330 full days during a period of 12 consecutive months) or the Bona Fide Residence test are exempt from Obamacare.
It important to note that in order to qualify for the exemption, you need to file the IRS Form 8965 with your tax return. The form is relatively easy to fill out and is available with instructions on the IRS website.
After spending the majority of their respective careers at two of the largest accounting firms (PwC and Ernst & Young), Joshua Ashman (firstname.lastname@example.org) and Ephraim Moss (email@example.com) founded Expat Tax Professionals, a firm specializing in the needs of U.S. citizens living abroad. You can visit the firm’s website at www.expattaxprofessionals.com.