The taxation process can seem highly complicated even to those of us who have been filing our tax returns for years. Unfortunately, becoming an expat does not make things any easier for you. In fact, when you become the resident of a foreign nation, it is imperative that you familiarize yourself with and adhere to the taxation policies of both the places.This could be a bigger challenge for Americans living overseas, as the filing obligations for the country’s citizens and green card holders are unique, unlike any other tax jurisdictions.
The government of the United States imposes income tax based on citizenship, not on tax residency. If you are a US national or a green card holder living and working outside of your home country, you are obligated to file a US tax return every year. The rules for filing income, estate and gift tax returns as well as paying estimated taxes generally remain the same whether you reside in the US or overseas. In short, you are subject to US income tax on your worldwide income, regardless of which nation you reside in.
Living and being employed in a foreign country could permit the application of special tax laws and regulations when certain criteria are met. It allows the offset of the US tax obligation in part or in entirety. Factors like your income, age and filing status usually determine whether you have to file a return or not. Under normal circumstances, you will be required to file your returns if your gross income from all sources (national and international) is at least the amount that is reflected for your status in Chapter 1 of the Filing Requirements Table of Publication 54, Tax Guide for the US Citizens & Resident Aliens Abroad.
Gross Income is inclusive of all revenue you receive in the form of cash, goods, services, and property that is not exempted from taxes. When you are trying to determine whether you have to file your returns or not, you need to look at any income that you usually exclude as “foreign earned income” or a “foreign housing amount” as your gross income. For those who are self-employed, gross income includes the amount on the Gross Income of Schedule C (Form 1040), Profit or Loss from a Business or the Gross Receipts line of Schedule C-EZ (Form 1040), Net Profit from a Business. The items that can be considered a part of your gross income are:
• Salary and wages
• Commissions or tips
• Consultancy fees
• Pension fund
• US or foreign social security
• Capital gains
• Rent on property
• Farm revenue
• Payments in kind
In addition to that, you could be liable to file a Form 8938, Statement of Specified Foreign Financial Assets if you are interested in specified foreign financial assets that are higher in value than the reporting threshold which applies to you.
If you have made contributions to, or received an income from, a foreign trust, or have received a gift from a foreign national, some of the other forms that you may also have to file are Form 3520 and/or Form 3520-A.
Do make sure that you declare your global income if you continue to meet the annually indexed minimum tax filing threshold amounts, which consists of the standard deduction and exemption. Given below are a few guidelines that will help you file your returns when you are living abroad.
When to file
The standard due date to file returns for all tax payers is April 15th. However, if you are a citizen or a resident alien of the US that is living overseas, you will automatically be allowed a 2-month extension to file your returns and pay the amount due. This also applies to military people on duty, based outside of the country. This extension lasts until June 15th in a calendar year return.
If you qualify for the extension the penalties for late taxes are assessed from the extended due date, ie June 15th. Do keep in mind though that you will be required to pay interest on the unpaid taxes from the original due date of returns.
Those who qualify for the 2-month extension but don’t manage to file their returns by June 15th have the option to request an additional extension, until October 15th. This can be done by filling out Form 4868, Application for Automatic Extension of Time To File US Individual Income Tax Return. However, the request for an extra extension has to be made before the automatic extension expires. Do keep in mind that while this extension will exempt you from any penalties, you will still be liable to pay interest on the unpaid tax amount from the original due date.
Where to file
A US citizen or resident alien based in a foreign country can file their returns by mailing their tax documents to this address:
The Department of the Treasury
Internal Revenue Service Center
Austin, Texas 73301-0215
United States of America
You can mail the estimated tax payments, long with the Form 1040-ES to this address:
Internal Revenue Service,
P. O. Box 1300,
Charlotte, NC 28201-1300
United States of America
Taxpayers that have an Adjusted Gross Income (AGI) that falls within a specified limit can have their tax returns filed electronically for free. This is done using the Free File Software program, which can be accessed on the ‘file for free‘ page of the IRS website. Those who have an AGI that is higher than the specified threshold can either use the Free File Fillable Forms or can eFile by buying commercial software. However, only a limited number of organizations provide software that can accommodate a foreign address. You can decide which application works best for you after going through the complete list of free file software offers and their services provided. This information is also available on the IRS website.
Tax Payer Identification Number
Every taxpayer who files their returns or claims to be a dependent on a US tax return has to be given a Social Security Number, also known as an SSN, or an Individual Taxpayer Identification Number (ITIN).
In order to obtain this number, you will have to use Form SS-5, Application for Social Security Card. Before you get the form, check if you are eligible for a Social Security Card. If you are, it is best to contact the Social Security Office. Alternately, you may also want to visit the Social Security Office website for more detailed information.
If neither you nor your spouse is eligible for an SSN, you could apply for an ITIN. For this, you will have to fill out Form W-7 and provide the relevant documents.
Foreign Currency and Exchange Rates
When filing your returns, make sure that all the amounts you mention are in US Dollars. If you receive your income (or part of it) in a foreign currency, you will need to covert the amount to dollars. This is also applicable to all your expenses. The manner in which you will do this depends on your functional currency.
Bear in mind that the US Dollar happens to be the functional currency for all taxpayers, except some of the Qualified Business Units (QBU). This can be described as a unit of trade, which maintains separate records and books. Very often, the American Dollar remains a person’s functional currency, even if they have a QBU. Such instances are likely to occur if:
• Your business is conducted in US Dollars
• The primary location of business is in the US
• The accounts aren’t maintained in the currency of the economic environment in which the main part of the business activities are conducted
Remember, you can also choose the US Dollar as your functional currency.
In general, taxpayers use the yearly average exchange rate for conversion, when reporting a foreign income that they received on a regular basis through the year. However, for individual transactions that took place on specific dates, please use the exchange rate of those particular days.
This information can be easily found online. To ensure a higher level of accuracy in reporting, it is best to use the exchange rates mentioned in the government’s resources. You can get access to these sources by logging on to the ‘currency and exchange‘ page of the IRS website.
Seeking Additional Help
The Internal Revenue Service in Philadelphia offers tax assistance to international citizens. You can reach their office from Monday to Friday, between 6:00AM EST and 11:00PM EST. Get in touch with them on:
Internal Revenue Service,
Philadelphia, PA 19255-0725
United States of America
Tel: +1 267 941 1000 (Not a toll free number)
Fax: +1 267 941 1055
The Taxpayer Service, which used to be offered at foreign posts of duty, is not available anymore. Instead, you could try locating an International Office that is close to you by logging on to the ‘contact my local office‘ page of the IRS website.
It is also possible for you to get help with an unresolved tax issue. If you are experiencing any kind of tax problem that has led to economic harm or has not been resolved through normal channels, get in touch with the Taxpayer Advocate. For more information on this, visit the advocates page of the IRS website.
Foreign Bank and Financial Accounts Reports
It is mandatory to file the FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), in case you had a financial interest in or any authority over these entities in a foreign country:
• A bank
• Other financial accounts
However, this is applicable if the value of these items exceeds US $ 10,000. It is not necessary to file the report if the assets are with a US military banking facility, are operated by a US financial institution or if the combined assets in the accounts are less than or equal to US $ 10,000 during the whole year.
The FBAR Form is not a tax return so the Form 1040 does not have to be attached. To file the FBAR electronically, use the BSA E-filing system. If that is not possible, you could get in touch with the FinCEN Regulatory Helpline at 1 800 949 2732, to make a request for exemption. People calling from outside the US can dial +1 703 905 3975 instead.
Authorities have also made it possible for people to seek help about queries related to FBAR. Anyone can call 1 866 270 0733 (toll-free if you are dialing from within the US) or +1 313 234 6146 for any queries. International filers are often asked to get in touch with the US Embassy or Consulate in their host nation for assistance.
Double taxation has been a bone of contention among expat Americans for quite a while now. For many, the strain of paying taxes in two nations becomes too much to handle. Even if you do not make an attempt to file your returns, the US government is likely to get information about your financial activities from your bank, because of the FATCA law. This is one of the main reasons why some Americans are choosing to give up their citizenship.
Taxation is usually a complicated procedure and things only get more difficult to understand if you are an expat. It is therefore best for you to consult a tax expert or preferably a tax lawyer, who is well-versed with the taxation laws and regulations in the US. Tax attorneys not only offer guidance on how you should file your returns but could also advise you on ways to minimize your dues to the government.