Expatriate Taxes

General Expat Tax Issues

Working overseas as a U.S. taxpayer generates both tax opportunities and tax risks. US Citizens and Green Card holders are obligated to file a US tax return similar to those who work and live in the U.S.

The Foreign Earned Income Exclusion is a significant tax advantage available to U.S. taxpayers living abroad.

Foreign Earned Income Exclusion

If qualified, $92,900 (For 2011) of income earned overseas is exempt from income tax, unless you are an employee of the US government. If you are a Foreign Service employee, and your spouse works in the local economy, the exemption still applies for your spouse.  To qualify for this exemption, the following situations must be met:

1. Bona fide residence Test: You must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. This is available to only U.S. citizens, not resident aliens.
2. Physical Presence Test:  A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
3. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

Special Situations

If you have special situations and unsure of your status please contact us and we will answer specific questions you may have. For example:

1. State Taxes – If you are an expat you have probably wondered if you should file or not. Depending on the State, there are differing laws on whether you should file a return in your domicile state or not. The penalties for under reporting can be significant, but avoidable.
2. Military families: You are entitled to significant benefits from the Military Families Tax Relief Act of 2003: Home Sale Preferences and Combat Pay Exclusion are two benefits that can help you. You may also be eligible to deduct home leave expenses as a miscellaneous business expense.
3. Employees of the US government: You are not eligible for the foreign earned income exclusion
4. Need to File State Returns—Certain taxpayers must maintain a state of domicile in the United States, and there may be tax obligations to that state.
5. Foreign Housing Exclusion or Deduction-- In addition to the foreign earned income exclusion, you may be eligible for exclusion or a deduction from gross income for your housing amount if your tax home is in a foreign country, you have self employment income, and you qualify under either the bona fide residence test or the physical presence test.
6. Retirement You generally still are eligible for the tax advantages of making contributions to retirement accounts. For the most part the foreign earned income exclusion will not affect them.
7. Are you self employed but working overseas? You are in need of a tax planning.  Please contact us to discuss a tax plan to minimize your taxes.

For further details regarding your tax situation as a US Taxpayer living abroad, please contact us and we will answer your questions.

Offshore Voluntary Disclosure Initiative (OVDI)

The IRS is offering people with undisclosed income from offshore accounts an opportunity to participate in a new, voluntary disclosure initiative in order to get current on their tax returns. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) will be available only through Aug. 31, 2011. However, taxpayers who made a good faith effort to comply may be eligible for an extension, detailed in Q&A 25.1 in the revised questions and answers.

The 2011 initiative has a higher penalty rate than the IRS’s previous voluntary disclosure program, which ended on Oct. 15, 2009, but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk IRS detection and possible criminal prosecution. In addition, the 2011 initiative includes new guidelines to provide fairness to people with smaller amounts of undisclosed assets or unusual situations.

FBAR

An FBAR is the Report of Foreign Bank and Financial Accounts. United States persons are required to file an FBAR if:

1. The United States person had a financial interest in or signature authority over at least one financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, located outside of the United States; and
2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

United States person means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

A person has signature authority over an account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained.

A “financial account” includes any bank, securities, securities derivatives or other financial instruments accounts. The term includes any savings, demand, checking, deposit or any other account maintained with a financial institution or other person engaged in the business of a financial institution. Financial account also generally includes any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.

Other authority exists in a person who can exercise power that is comparable to signature authority over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.

The FBAR is not filed with the filer's federal income tax return. The granting, by the IRS, of an extension to file federal income tax returns does not extend the due date for filing an FBAR. You may not request an extension for filing the FBAR. The FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported.

Failure to file an FBAR when required to do so may potentially result in civil penalties, criminal penalties or both. Records of accounts required to be reported on an FBAR must be retained for a period of five years.