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7 Important Issues to Consider For Overseas Americans Repatriating to the US In the Middle of the Year

Ines Zemelman, EAJan-10-2016

Moving back to the US in the middle of the year is the most common way anybody makes their move back. If you think about it, nobody is going to plan their move to happen on Dec-31st. Aside from readjustment to life in the US and the burden of relocation, moving in the middle of the year is certain to have an impact on your taxes. The below tips are essential reading during your repatriation planning.

1. US Expat Taxes: Foreign Earned Income Exclusion for Part-Year Residents

While working abroad you likely have got used to the Foreign Earned Income Exclusion. US citizens who return home after working abroad during the middle of the year still qualify for partial exclusion of their income earned during the part of the year spent abroad.

US citizens must report and pay taxes on their worldwide income to the US government on their annual tax return. That said, US citizens who live abroad are eligible to exclude a portion of their foreign income by qualifying for the Foreign Earned Income Exclusion (FEIE).

- As the name implies, the Foreign Earned Income Exclusion is only available for foreign earned income. You cannot use the this exclusion to exclude any US sourced income.

For 2016, this exclusion is capped at $101,300. To be eligible for FEIE, you must pass one of two tests - Bona-Fide Residency Test (BF Test) or the Physical Presence Test (PPT)

- If you have previously qualified for the Bona Fide Resident Test you can continue claiming the exclusion based on the Bona Fide Resident Test, even if you moved back to the US in the middle of tax year.

- To qualify for the Physical Presence test, you must live abroad for at least 330 days out of a 12 consecutive months period.

If your foreign work assignment was a contract with a defined ending date then the Physical Presence test should be used to claim the exclusion.

Note that the 12-months calendar period utilized to obtain PPT does not need to coincide with the actual date of return to the U.S. It can be any period leading up to the filing of your tax return. The amount of foreign income a taxpayer is eligible to exclude will be prorated based on the number of days in the calendar year that he or she was physically present in a foreign country.

2. Keep Record of Moving Expenses

Moving expenses related to your return to the U.S. may be a powerful tax deduction. When first moving abroad, your moving expenses were adjusted for the amount related to excluded foreign income. When returning to the US there is no such adjustment and you can deduct the full amount. There are special rules that allow you to split the deduction between two years if this can benefit your bottom line.

3. Foreign Tax Credit Carryover

During years of working abroad you likely have accumulated a pool of unused Foreign Tax Credit paid to your prior country of residence. You will continue carrying over the balance year to year. That credit will remain usable for 20 years until it expires. Unfortunately, you cannot apply unused foreign tax credit against U.S. sourced income but if you move abroad again within the following 20 years it will turn into a valuable asset.

As a working example, assuming you move to a low-tax or no-tax country (ie. UAE), the balance of unused foreign tax paid while you worked in the UK or Australia will be very helpful.

4. State Tax Impact

During the year of repatriation, you will most certainly be required to file a Non-Resident or Part-Year Resident State Tax Return for the state where you establish domicile in the U.S.

- Prior to repatriating, you should find out what type of foreign income is taxable at the state level. This is very, very important. Plan ahead!
 

- Rules vary by state but generally pension income is taxable in the state where you live - hence, if you plan to cash out your foreign retirement plan it is better to do so before you changed your domicile to the U.S.

- Unlike pensions, capital gains are generally taxed by the locality where the capital gains arose. This means that you don’t need to rush to liquidate foreign securities because capital gains will be taxed only at the federal level. Make sure to consult your tax advisor for particular state tax rules.

You might benefit from having a personal consultation to plan this particular aspect of your move back. Please see our Mini Phone Consultation page for more details about it.

5. U.S. Health Coverage

U.S. Health coverage exemption for taxpayers meeting the Physical Presence test or Bona Fide residence test will remain in force for the months spent abroad. Upon returning to the U.S. you must secure U.S. health coverage for yourself or your dependents to avoid an ACA penalty.

You have the right for a short-term coverage gap for up to 3 months until you obtain health insurance through an employer or private health insurance.

6. Change in Filing Due Date

While living abroad you likely utilized the automated two-month extension granted to expats to file their taxes.

Now that you are considering repatriating, please note that if you are resident in the US on April 15th, your tax return is due on April 15th. If you reside abroad on Apr 15th, you have an automatic extension to file until June 15th. 

Please note - if you have any tax due, it is must be paid by Apr 15th or interest will accrue. Extension to file does not mean extension to pay!

If more time is needed, you can still file Form 4868 to request an additional extension to file your tax return until October 15th. Note - you must now file your extension form by April 15 if you are in the US.

7. Plus ça Change - Changes in Financial Account Reporting

Regardless of whether the U.S. person lives abroad or stateside, Financial Reporting compliance requirements remain. They include filing FinCEN 114 (aka FBAR) and Form 8938 (aka FATCA).

The threshold for FBAR reporting is the same whether you live stateside or abroad - $10K in aggregate balance of all foreign financial accounts.

- Note that foreign pension accounts that may be dormant in the country where you previously worked still need to be reported on FBAR when you file this form upon returning to the U.S.

The threshold for FATCA reporting (form 8938) is different if you live stateside versus living abroad. The filing threshold is now much lower - and this lower threshold applies for the year of repatriation as well.

 

Stateside FATCA (Form 8938) Filing Thresholds
 

Filing Status

Single/

Head of Household/

Married Filing Separately

Married Filing Jointly

Aggregate Value At Year End:

$50,000

$100,000

Highest Aggregate Value At Any Time During the Year:

$100,000

$200,000

You must continue filing any informational returns you were required to file while living abroad (form 5471 for foreign corporation, form 3520-a for foreign trust, etc.)

 

Zemelman

   
 
 Ines Zemelman, EA is the founder of Taxes for Expats
   She may be reached at: +1-646-397-2887
   Email: [email protected]
   Web site: www.taxesforexpats.com