Simple Guide To American Expatriate Tax Obligations
By IJ Zemelman, EA, Taxes for Expats LLP.
The moral of the story: always file your tax return
As an American expatriate, you are required to file your federal tax returns yearly, just like a U.S. citizen or resident who doesn't live abroad. Because, fact is, it's not just your U.S. income that determines your tax rates, but your total income from any country. In other words, your foreign income counts. On the plus side, you're entitled to a bunch of expatriate tax benefits: foreign tax credits, income exclusion, and housing allowances to name a few. If you're careful, you can also score some bonus points with a couple of the less apparent benefits, which we'll outline below. Remember, you must file your Federal tax return to get these exclusions!
How do I qualify for the Foreign Earned Income Exclusion then?
To take advantage of the Foreign Earned Income Exclusion (Form 2555 and Form 2555-EZ), all you have to do is 1) live in another country and 2) file your taxes there. Additionally, if you and your spouse both qualify, you may be able to file jointly.
What income can you claim? For these purposes, the income we're talking about is just what you make from services rendered. In other words, income from any interest, dividend, or rental income doesn't count. In 2010, American expatriates were able to claim up to $91,500 as U.S. tax exempt income through tax exclusions.
Ok, now what counts as foreign? As far as the IRS is concerned, it's anything aside from the 50 American States and any of its controlled territories: American Samoa, Micronesia, Guam, Norther Marina Islands, Puerto Rico, or Republic of Marshall Islands.
That's all you need to know about the where. Now, to qualify for the 2555-Forms, here's what you need to know about the when. You must:
- Be national or citizen of the U.S. OR of another country that has a income tax treaty with the U.S.
- Live in another country, consecutively, for at least a whole tax year OR live there for a minimum of 330 full days over 12 months in a row.
What about these Foreign Tax Credits?
Guess what? If you paid foreign taxes on your income, you don't have pay U.S. income taxes on the same income! To take advantage of this, file the Foreign Tax Credit Form (Form 1116). (If you're a corporation, use Form 1118 instead.) Any income tax you still owe to the U.S. (if any), will be substantially reduced, because you can subtract whatever you paid abroad!
A few countries also have information exchange or sharing agreements with the U.S.
Barbados, Bermuda, Colombia, Costa Rica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Marshall Islands, Mexico, Peru, St. Lucia, Trinidad and Tobago.
While most countries have tax treaties in place with the U.S. which allow for these tax credits, but there are a few rules and exceptions:
- Travel restrictions: Notable U.S. travel exceptions include Cuba - although they are being eased in January 2011 so you may want to check with the State Department.
- Tax home: In the event of civil unrest or war, you may be able to get an exception allowing you to still claim your residence abroad as a tax home.
Note: these treaties extend a few other rules too, like ones relating to IRS audits. Since the IRS actually has up to 3 years to audit your returns after you've filed them, filing any return begins this 3-year period (regardless of whether you have any taxable income).
Self-Employed? Here's what you need to know about Social Security & Medicare:
If you're self-employed and working abroad, you're still typically subject to a foreign income tax. Since you still have to pay all Federal taxes, you will have to pay the self-employment tax. File your Schedule SE and Schedule C, same as you would at home. (Note the SE rate is approximately %15.3 of the income you claim for Schedule C and it is not reduced by foreign income credits.)
On the plus side, you're not going to be paying other taxes, such as the Medicare or Social Security tax. The U.S. has a Social Security Totalization Treaty with some countries, allowing you to benefit from a participating country's social insurance system. If you opt in to this system, you may have to pay their Social Security tax, but you won't have to pay a U.S. one as well.
Timing is everything
If you can show evidence of your foreign-based income, you will probably qualify for an automatic extension, meaning your return is due by June 15, not April 15. Citizens or residents who are serving in a military capacity abroad may also qualify.
For even more time, you can file for another extension and your returns won't be due until October 15. But, be aware that this extension isn't simply mean you get more time until you pay! Taxes will continue to accrue during these extra months, and they may be hit with additional interest or penalties. Form 2210 gives you some options to possibly reduce these penalties.
IJ Zemelman, EA is a Principal at Taxes for Expats LLP.
She may be reached at [email protected] or +1-646-EXPAT-US
Web site: www.taxesforexpats.com