Taxes for Wealthy Expatriates
The current trend seems to be legal expatiation for wealthier US citizens who have moved overseas. Dual taxation and high expat tax have caused many wealthy Americans to make the difficult decision to permanently renounce their US citizenship. While there are many tax reducing strategies that can reduce a citizen’s tax liability, the majority of these apply only to residents on US soil. It is especially important for wealthier Americans to be aware of the issues facing them as expats.
When it applies, dual taxation is the primary reason why an American might choose to renounce his citizenship. While many countries tax only their residents, the US taxes its citizens (no matter where they are in the world). If an American citizen is living in a country which taxes its residents, he may be faced with the financially crippling issue of dual taxation.
But the US government is not anti-expat, and certain fail safes are in place to lessen the burden.
- Treaties: The US has effected tax treaties with many foreign countries. With these treaties in place, the expat (who is living under their protection) will enjoy reduced taxes and specific exemptions.
- Totalization agreements: To protect its citizens from paying toward two social security programs, the United States Social Security Admin kindly enacted the principle of totalization with twenty-four countries.
- Foreign Tax Credit: If an American expat is required to pay taxes in his country of residence, the Foreign Tax Credit will reduce his/her US obligation dollar = dollar.
- FEIE: American expats may exclude income in amounts not exceeding $92,900 under the foreign earned income exclusion.
- Housing Deduction: American expats may deduct or exclude their overseas housing expenses (including utilities, rent and insurance).
Alternative Minimum Tax
The tax principle referred to as (AMT) alternative minimum tax was established to stop wealthier Americans (and corporations) from completely reducing their tax liability by means of various clever tax strategies. Wealthy American expats should understand the ins and outs of AMT. Fortunately, the Foreign Tax Credit is still applicable under the AMT guidelines; however, the calculations are different and more complex. If you are a wealthy American living overseas, it is essential to your financial planning that you educate yourself on the complex AMT and hire a tax professional who specializes in expat matters.
Foreign Financial Accounts US citizens who have relocated and are living overseas are likely to have money in foreign accounts. If an expat has a combined foreign balance of $10,000 or more (at any time during the tax year), he/she must report that amount to the US Treasury via Form 90-22.1. This is the Report of Foreign and Financial Accounts, commonly referred to as the FBAR. A failure to file the FBAR can result in harsh penalties, so it is important to have an accountant review the monthly and daily details of all of your foreign accounts.
While the US Treasury requires the FBAR, the IRS requires that citizens report their foreign accounts via Form 8938. The filing thresholds are different than for the FBAR. Visit the IRS website for more information.
Additionally, the IRS demands a reporting of its citizen’s worldwide income. Do not forget to include the interest from your foreign accounts.
US HIRE Act
The US HIRE Act will go into effect in 2013. While the purpose of the act is to reduce staggering rates of unemployment, it will have a somewhat negative side affect on US expats. In addition to the FBAR, starting in 2013, expats will be required to report foreign holdings of more than $50,000 on their standard tax return. Also, foreign banks must report back to the US regarding their American expat account holders. The US has made a energetic effort to crack down on hidden foreign money and tax dodging, and these new measures are just another aspect of that effort. Unfortunately, the added obligation will make US citizens even less attractive to foreign banking institutions.
Wealthy individuals are afforded with many investment opportunities, many in countries other than their country of residence. To make advantage of these opportunities, money must be transferred between currencies. Currency exchange fees can make this costly. Additionally, gain and loss between the currencies must be considered as there is rarely ever an “even trade”. Gains and losses resulting from currency exchange (over $200) will be taxed under standard capital gains laws.
The US government has strict rules where is comes to their citizens and foreign investments. US taxpayers with interest in foreign trusts, mutual funds, etc are under increased reporting requirements beyond what is standard for expat tax returns. Investments in specific organizations (mutual funds, for example) will require that shareholders pay tax on each year’s increase rather than at the time of distribution. Due to strict SEC regulations, investing in foreign stock can be a headache. But American expats may still find these investments to be worth the trouble. In fact, some expats find foreign investments so worthwhile that they set up corporations to act as investment mediums. Although, this would place the expat under additional reporting requirements as a foreign business owner.
The above are just some of the issues that US expats face at tax time. To swim through these foreign waters with as little liability as possible, choosing the right tax expert is essential. For all things expat, contact the professionals at Taxes for Expats today!
I.J. Zemelman, EA is the founder of Taxes for Expats