For many, filing tax US returns is an unpleasant and complicated task under the best of circumstances. And most often, filing from abroad doesn't make things any easier.
Not only do different rules apply, but even the ‘regular' rules work in different ways – and keeping track of everything is no easy task.
To help sort through the confusion, The Local has compiled a list of some common tax questions asked by US expat readers.
For answers, we turned to Ines Zemelman, founder and President of Taxes for Expats (TFX) who specializes in American expatriate taxes:
Q: Are there any changes to the tax code that will affect US taxpayers living abroad? Has the incoming administration made any tax promises specifically related to expats?
A: This is certainly a huge topic of discussion. While this is purely conjecture, much of the focus has been on consolidating tax rates into three tiers (from the current seven), elimination of the estate tax, and possible corporate tax changes.
One item that has been discussed but yet not clarified is the possible increase of the standard deduction in conjunction with elimination of personal exemptions. This combination would disadvantage families with children.
For example, a married couple without children would see a decrease of taxable income by $10,000, while a couple with three children would have a $3,000 increase in taxable income. Currently families with children can deduct $33,000 through standard deductions and personal exemptions, whilst under the new rules they could only deduct $30,000.
Q: I've never filed an FBAR, should I be afraid to start? What happens if I keep putting it off?
A: There is absolutely nothing to be afraid of, except inaction. If you are behind on tax returns, FBARs, or other reporting requirements, the IRS has instituted a specific programme to help you get compliant with amnesty from penalties. Our advice is to get compliant ASAP, as the only real risk is that the IRS changes the programme that allows people to avoid penalties by coming clean now.
Q: What's the difference between FATCA and FBAR? What are the consequences of not filing them?
A: They are similar in that they are both informational forms that describe your non-US financial accounts and do not generate any tax due. FBAR is a stand-alone form submitted to the US Department of Treasury and has a minimum filing threshold of $10,000 at any point in time in aggregate across all non-US financial accounts. FATCA (Form 8938) is submitted to the IRS as part of your US tax return and carries higher thresholds which vary depending on your location and filing status. You can learn more here.
Q: Should I file using the Foreign Earned Income Exclusion or the Foreign Tax Credit?
A: If you have children living at home you should consider using the Foreign Tax Credit (FTC), which allows you to claim the child tax credit ($1,000 per child). This credit can't be utilized using the Foreign Earned Income Exclusion (FEIE). For example – a family with three children living in Germany, and earning €80,000, can get a $3,000 US tax refund with the FTC, but with FEIE they get no refund.
For those earning more money, however, the FEIE allows you to exclude up to $100,000 of income, so this option can lead to a lower tax outcome with some financial engineering. It's also important to bear in mind that, if you utilize FEIE, and then choose not to, you cannot utilize it again for five years, so planning ahead is key.
Of course, it's always wise to consult with a qualified expat tax professional to help determine which option is best for you.
Q: I'm looking to sell the home I purchased abroad. What are the US tax implications?
A: The tax implications are the same as if you owned property in the US: selling property abroad is a reportable item and the income must be reported on your US tax return. There may also be capital gains tax if you make a gain on the sale, but there are mitigating factors in place that allow you to exclude up to $250,000 of gains if the house was your primary residence.
You should also keep all records of money spent on home improvement, which can help raise the cost basis of your home. And the purchase of a home is not a reportable item in the year when the purchase occurred, however purchase-related expenses will be accounted for at the time of property sale.
Q: I've left my job and am now self-employed and living abroad. What do I need to do differently when I file taxes in the US as someone who is self-employed?
A: The biggest difference is that self-employed individuals may be liable for SECA (Social Security and Medicare) taxes. If you live in a country that has a totalization agreement with the US then you have the option to just pay into one system. If you live in a country that does not have one then you may face double taxation as you are required to pay into the US Social Security system and result in a 15.4 percent tax hit.
Q: I haven't filed a US tax return in years. What are the risks if I start filing now?
There is always a risk of getting audited when filing a tax return (roughly 2 percent of returns are audited annually), however the bigger, and far more realistic risk is failure to file penalties and FBAR penalties if you are under investigation by the IRS. Once an examination is underway, you would be ineligible for the amnesty programmes discussed above and at risk for draconian penalties. We strongly recommend to utilize the IRS' olive branch and get into compliance right away.
Q: My local, non-American bank asked me to tell them whether or not I am a US citizen. What are the risks of sharing or withholding this information with my bank?
A: If you are a US citizen with a non-US bank account, the ‘FATCA Letter' from your bank may come sooner or later because the local banking regulators are cracking down on them. You can either provide them with the information they want (simply that you are a US citizen and that you are up to date on your US tax returns), or you can risk having them close your account.
Remember – FBAR and FATCA do not carry tax implications – they are simply informational forms declaring your non-US financial accounts so that governments can track the flow of money and prevent money laundering. It's best to use the streamlined foreign offshore programmes to get compliant without fear of penalties.
Still have questions? Click here to register with TFX for expert tax advice for US expats.
This article was produced by The Local and sponsored by Taxes for Expats (TFX).