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Many of the questions we receive from American expats are the same. However, most of the answers are different due to the uniqueness of each expat’s situation and the complexity of the available tax benefits. Be careful when implementing advice from Internet articles, well-meaning friends or family, or tax professionals with only stateside experience. While their advice might be close, or even 100% correct, it might not be right for YOU.
After years of working with American expats, we limit the details of our online answers. Our dilemma is that the general scope of the regulations can seem to be at cross-purposes to one another. However, we have found that the facts and circumstances of each unique client makes the available benefits and options more obvious.
Don’t make your tax and reporting decisions alone, risking unnecessary mistakes and penalties. Remember, questions are free, please Contact us.
TOP QUESTIONS OUR EXPATS ASK
Why can’t I use my current CPA?
Do I have to file a U.S. tax return?
What if I don’t file the bank and financial accounts reporting (FBAR) form?
What if I want to establish a business, buy property, or place an investment?
How do I know if I qualify for expat tax benefits?
What potential penalities do I face?
What tax benefits do I get as an expat?
What other resources are available to me?
Why can’t I use my current CPA?
Many expats work statewide with their local tax professional for many, many years before going abroad. These relationships usually have a long history of trust and competency. Once you’ve found someone you trust to understand your unique financial situation, it is difficult to switch. However, properly completing an expat return is simply uncharted territory for most local tax professionals. You do both yourself and them a disservice by forcing them to make this stretch into such a complicated arena. As you operate at a new tax and financial level, you are simply going to need a greater scope of service than is typically provided by a stateside firm.
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Do I have to file a U.S. tax return?
Yes. As a U.S. citizen worldwide income is subject to U.S. income tax regardless of where you live. Foreign taxes may be assessed in addition to U.S. income taxes – state taxes may be due as well. To mitigate double taxation, credits and deductions are available.
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What if I don’t file the bank and financial accounts reporting (FBAR) form? (Treasury Form TDF 90-22.1)
Not disclosing offshore bank and financial accounts can be a costly mistake.
A failure to file is penalized differently than a willful failure to file. A failure to file caps at a $10,000 penalty or 50% of the unreported account’s value. WILLFUL failure jumps that amount to $100,000 or 50% of the unreported account’s value. Guess which one the IRS is going to apply to your unreported accounts? Don't be caught in non-disclosure, the penalty of jail time may also be applied.
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What if I want to establish a business, buy property, or place an investment?
Many expats participate in foreign business and property ownership arrangements. ALL of these situations are unique and subject to additional reporting requirements and taxation regulations – whether foreign or domestic. If you are looking to establish a business or buy property, plan your process first with a CPA experienced in expat tax and finances.
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How do I know if I qualify for expat tax benefits?
The IRS outlines two tests for determining your qualification: the Bona Fide Resident Test and the Physical Presence Test.
The Bona Fide Resident Test describes a U.S. citizen who resides in a foreign country or countries for an uninterrupted period that includes the entire year. Also included is 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.
The Physical Presence Test describes 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. However, the exception to this is you become a bona fide resident of your new locale, the 330-day rule no longer applies.
Planning your American expatriate experience ahead of time with an experienced expat tax guide can allow you to make smart decisions about your expat adventure!
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What potential penalities do I face?
While everyone is familiar with the penalties associated with non-disclosure of foreign bank and financial accounts, it is important to note other types of penalties.
Failure to timely file your U.S. tax returns can result in the loss of some of the tax benefits available to American expats. Depending you your foreign activities, there are additional IRS forms that specifically must be filed, for which the penalties START at $10,000 and go up from there.
Working with a CPA experienced in expat taxes can help you navigate the myriad of reporting requirements while helping you maximize the tax benefits of living and working abroad.
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What tax benefits do I get as an expat?
Foreign Earned Income Exclusion (FEIE – Form 2555)
Foreign Housing Exclusion (FHE – Form 2555)
Foreign Tax Credit (FTC – Form 1116)
You cannot get double credits or deductions. If foreign income is excluded, you cannot claim any credits or deductions that are related to the excluded income. Additionally, a tax credit is better than a deduction. The calculations to maximize your available tax credits can seem confusing, you may need to make very personalized decisions based on your unique situation and goals.
Managing the correlation of these (and other) tax benefits for American expats is not for amateurs. We make this look easy because we do it all the time. Work with a CPA experienced in expat taxes to maximize your tax benefits.
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What other resources are available to me?
NCH Wealth Advisors, Inc.
Money Concepts International
International Travel
Direct contact: Connie Marino (877) 275-3222
International Living
Go South Expat
Expats Moving and Relocation Guide
Petersen & Philips Law Offices
Costa Rica Attorney
Roberto Moreno di Donato
Ecuador Attorney
roberto@morenodidonato.com
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