Tax guide for Americans in France

Social Security in France

The French social security system, known as "Sécurité Sociale," is a comprehensive welfare system that provides a wide range of benefits to its residents.

It covers areas such as health care, family benefits, unemployment insurance, and retirement pensions. Funded primarily through contributions from employers and employees, the system ensures that individuals have access to essential services regardless of their employment status or income level.

• Health care: Residents in France are entitled to health care benefits, which cover a significant portion of medical expenses, including doctor visits, hospital stays, and prescription medications.
  
  Individuals may also opt for supplementary private health insurance, known as "mutuelle," to cover costs not fully reimbursed by the state.
• Family benefits: The system provides various benefits for families, such as allowances for childbirth, child-rearing, and housing. These benefits aim to support families and ensure the well-being of children.
• Unemployment insurance: In the event of job loss, eligible individuals can receive unemployment benefits, which are calculated based on their previous salary and the duration of their employment.

French pension system

The French pension system is a pay-as-you-go system where current workers fund the pensions of current retirees. It is divided into three main pillars:

1. Basic state pension (Régime de base): This is the mandatory pension scheme for all workers in France. The amount of pension received depends on the individual's earnings, the number of quarters contributed, and the age at which they retire.
   
   The legal retirement age varies depending on the birth year, with reforms aiming to gradually increase it.
2. Compulsory occupational pension (Régimes complémentaires): In addition to the basic state pension, employees and employers contribute to occupational pension schemes.
   
   These schemes provide additional retirement benefits and are typically based on the individual's salary and years of service.
3. Voluntary private pensions: These are optional pension schemes that individuals can choose to contribute to, either through personal pension plans or employer-sponsored schemes.
   
   They offer a way to supplement the state and occupational pensions, especially for those who wish to maintain a certain standard of living in retirement.

Deductions and credits for expats in France

Personal employment expenses

Expatriates who are employed in France can deduct certain employment-related expenses from their taxable income. These include:

• Professional travel: Costs related to commuting between one's home and workplace can be deducted. This includes public transportation fees, fuel costs for personal vehicles, and other related expenses.
• Work attire: If specific clothing is required for one's profession and is not suitable for everyday wear (e.g., uniforms or protective gear), its cost can be deductible.
• Professional training: Expenses related to furthering one's professional skills, such as courses, seminars, or workshops, can be considered for deduction, provided they are directly related to the current profession.

Personal deductions

Several personal deductions are available to reduce the taxable income of expatriates in France:

1. Alimony and child support: Payments made towards alimony or child support are deductible from the taxable income. This applies to legally mandated payments made to an ex-spouse or for the support of children.
   
   However, voluntary payments or gifts are not considered for deduction. It's crucial to have official documentation or court orders specifying the amount and nature of these payments to claim this deduction.
2. Social contributions: Certain social contributions, which are not reimbursed or compensated, can be deducted. This includes contributions towards health insurance, pension schemes, and other social welfare programs.
3. Charitable donations: Contributions made to approved charitable organizations in France can be deducted. The amount of deduction may vary based on the nature of the organization and the total contribution made during the tax year.

Personal allowances

In France, personal allowances play a significant role in reducing the taxable income of individuals. These allowances are predetermined amounts that can be deducted from one's gross income, ensuring that a portion of income remains non-taxable.

The allowances vary based on factors such as the taxpayer's age, marital status, number of dependents, and specific life situations like disability.

Personal tax credits

Tax credits are amounts that can be directly deducted from the tax owed, rather than from taxable income. For expatriates and residents in France, several personal tax credits can be availed:

1. Charitable contributions: Donations made to recognized charitable organizations in France can qualify for a tax credit. The credit is usually a percentage of the donated amount, encouraging individuals to contribute to charitable causes.
2. Child care expenses: Parents who incur expenses for child care services, such as nurseries or babysitters for children under six, can claim a tax credit. This credit aims to support working parents and ensure the well-being of children.
3. Schooling expenses: A tax credit is available for parents with children attending secondary school or higher education institutions in France. This credit recognizes the financial burden of education and aims to alleviate some of the associated costs.
4. Domestic help expenses: Hiring domestic help, such as cleaners, gardeners, or caregivers, can qualify individuals for a tax credit. This initiative promotes employment while providing relief to those requiring assistance at home.
5. Tax credit on expenses for energy transition: To promote sustainable living and environmental consciousness, the French government offers a tax credit for individuals who incur expenses related to energy transition.
   
   This includes investments in energy-efficient home renovations, installations of renewable energy sources, and other eco-friendly home improvements.

Global limit of tax credits

In France, while numerous tax credits are available to taxpayers, there is a global limit imposed on certain tax advantages.

This means that the total amount of tax reductions and credits one can claim is capped at a specific threshold, ensuring that every taxpayer contributes a minimum amount to the state's revenue.

The global limit is set annually by the French tax authorities and varies based on the taxpayer's situation and the nature of the credits claimed.

If a taxpayer's total tax advantages exceed this limit, the excess amount will be added back to their tax liability.

Filing income tax returns in France

Filing an income tax return is an annual obligation for residents and certain non-residents with income sources in France. Here's a brief overview of the process:

• Declaration: Taxpayers must declare all their income sources, including wages, business income, rental income, and capital gains. The French tax authorities provide pre-filled tax forms, especially for salaried individuals, but it's the taxpayer's responsibility to verify and complete any missing information.
• Online filing: With the advancement of technology, France encourages online tax filing. The online portal is user-friendly, and secure, and provides instant calculations, making the process more efficient.
• Deadlines: The tax return filing deadlines vary based on the taxpayer's residence and the chosen filing method (paper or online). It's crucial to adhere to these deadlines to avoid penalties.
• Payment: Once the tax return is processed, taxpayers receive a notice indicating the amount of tax due. Payments can be made online, by direct debit, or at local tax offices.
• Tax refunds: If a taxpayer has overpaid their taxes, they will receive a refund. The refund is typically processed a few months after the tax return submission.
• Non-residents: Non-residents with French-sourced income, such as rental income from a property in France, are also required to file a tax return. The process is slightly different, and specific forms must be used.

Tax treaty between the US and France

The United States and France have a bilateral tax treaty in place, designed to prevent double taxation and fiscal evasion for individuals and businesses operating in both countries.

This treaty played a pivotal role for American expatriates living in France and French citizens residing in the US. Key highlights of the treaty include:

1. Double taxation avoidance: The treaty ensures that income earned by a resident of one country but sourced from the other is not taxed twice. Tax credits or exemptions are provided to offset taxes paid in one country against the tax liability in the other.
2. Withholding tax rates: The treaty sets reduced withholding tax rates on dividends, interest, and royalties. This is particularly beneficial for businesses and investors operating cross-border.
3. Pensions and Social Security: Provisions are made for the taxation of pensions, annuities, and social security payments, ensuring that retirees are not unduly taxed on their income.
4. Information exchange: The treaty facilitates the exchange of tax-related information between the US and France, promoting transparency and cooperation in tax matters.
5. Residency: The treaty provides guidelines to determine the residency status of individuals and entities, which is crucial for tax purposes.

Most popular tax forms for US expats

For American expatriates, especially those residing in France, navigating the US tax system can be challenging. However, understanding the most commonly used tax forms can simplify the process:

1. Form 1040: This is the standard US individual income tax return form. All US citizens, including those living abroad, must file this form if they meet the minimum income requirements.
2. Form 2555: Known as the Foreign Earned Income Exclusion, this form allows US expats to exclude a certain amount of their foreign-earned income from US taxation.
3. Form 1116: This form is used to claim the Foreign Tax Credit, which allows US expats to offset taxes paid in France against their US tax liability.
4. Form 8938: The Statement of Specified Foreign Financial Assets requires US expats to report certain foreign financial assets if they exceed specific thresholds.
5. FBAR (FinCEN Form 114): This form is not a tax form but is required for US expats who have foreign bank accounts with an aggregate value exceeding $10,000 at any point during the year.
6. Form 8833: This form is used to claim treaty benefits and to disclose positions taken by the taxpayer that are contrary to the provisions of the US-France tax treaty.

When are France's taxes due?

For residents and non-residents with tax obligations in France, it's essential to be aware of the tax deadlines to ensure timely compliance and avoid potential penalties. The key dates for tax filing in France are as follows:

• Income tax returns: Typically, the deadline for paper tax returns is in late May, while online tax return deadlines are staggered and usually fall in late May to early June, depending on the department in which the taxpayer resides.
• Payment deadlines: Once the tax assessment notice is received, usually around August, taxpayers have until mid-September to make the payment. For those who opt for monthly installments, payments are spread out from January to October.
• Wealth tax (IFI): For those liable for the Tax on Real Estate Properties (IFI), the filing and payment deadlines align with the income tax deadlines.
• Value Added Tax (VAT): Businesses registered for VAT in France must typically file monthly or quarterly returns, depending on their turnover. Monthly returns are due by the 19th of the following month, while quarterly returns are due by the 19th of the month following the quarter-end.

These dates can vary slightly each year, and any changes or extensions announced by the French tax authorities should be monitored.

France tax forms for US expats

Some of the key tax forms that US expats might encounter include:

1. Form 2042: This is the primary income tax return form for individuals. It covers various types of income, including wages, pensions, and rental income.
2. Form 2047: Specifically designed for foreign income and tax credits, this form is crucial for US expats reporting income earned outside of France.
3. Form 3916: This form is for declaring foreign bank accounts. Given the stringent reporting requirements, US expats with bank accounts outside of France must ensure they file this form.
4. Form 2044: For those with rental income, especially from properties outside France, this form is used to declare such income.
5. Form 2074: This form is used to declare capital gains from the sale of securities, shares, and other movable property.
6. Form 2042-C: For those benefiting from tax credits, reductions, or specific regimes like the inbound assignee regime, this supplementary form is used.