Bitcoin has been dominating headlines over the last few months, as it’s value has risen and fallen, and many questions still linger over its viability as a currency and its value as an asset going forward.
For many expats though, Bitcoin has been simply a useful way of getting paid across borders, while others have treated it as an investment.
One question that has arisen though is if and how Bitcoin (and other virtual or cryptocurrencies) should be reported to tax authorities.
Because the US taxes based on citizenship, Americans are required to file US taxes wherever in the world they live.
Thankfully, there are a number of exemptions available, such as the Foreign Earned Income Exclusion and the Foreign Tax Credit, that allow expats to avoid double taxation, although these must be actively claimed when expats file their federal return.
Americans living abroad may have further reporting requirements relating to FATCA and FBAR.
General FATCA and FBAR rules
FATCA, the 2010 Foreign Account Tax Compliance Act, requires expats with foreign financial assets worth over $200,000 at any time during the year to report them by filing form 8938 along with their US federal tax return.
Expats with a total of over $10,000 in foreign financial accounts including bank and investment accounts) meanwhile at any time during the year must also file a Foreign Bank Account Report, or FBAR, to FinCEN.
Bitcoin (and other cryptocurrency) reporting for expats
“Today there's a virtual currency team within the IRS. The agency also hired a cryptocurrency software company called Chainalysis to trace the movement of money through the bitcoin economy” - CNBC
The creation and rise of Bitcoin and other cryptocurrencies have led to questions over whether and how Bitcoin should be reported when expats file their tax returns.
In 2014, the IRS issued guidance regarding this. In summary, if expats are paid in Bitcoin, they should report it as they would any other income on their federal tax return (and state return if applicable).
If on the other hand expats buy Bitcoin (or other cryptocurrencies) as an investment, any gain or loss they make on their investment should be reported as they would any other capital gain or loss.
So should US expats report Bitcoin Holdings under FATCA and FBAR?
Things are less clear though regarding whether Bitcoin should be included in FATCA and FBAR reporting.
In 2014, the IRS stated that it didn’t require virtual currency accounts to be reported on an FBAR, with the caveat that this may change in the future. Given the recent rise in profile and popularity of Bitcoin and other virtual currencies, it would seem prudent to now confirm that the advice given in 2014 still stands.
Further more, the IRS has been taking clear steps to find out who does and doesn’t have virtual currency accounts. It recently won a case forcing Coinbase, one of the most popular cryptocurrency exchanges, to reveal its 14,000 account holders. The case will no doubt act as a precedent as the IRS requests information from other virtual currency service providers. The IRS is also actively tracking virtual currency movements, globally.
What Is FBAR? The Foreign Bank Account Report (FinCEN form 114) | Bright!Tax - YouTube
Golding and Golding attorneys suggest that if Bitcoins are kept in a personal wallet at home, there’s no reason why they should be reportable on an FBAR. American expats who hold cryptocurrency in a foreign-based trading account such as a Blockchain account (Blockchain is located in Luxembourg) find themselves in a more ambiguous situation however.
The bottom line is that there is no clear official position on this. As a result, many tax specialists are urging a cautious approach, encouraging expats with virtual currency accounts held at foreign institutions to report them on an FBAR. There’s no immediate tax implication resulting from reporting these accounts after all, up until a taxable profit is realized. At Bright!Tax, we would endorse this cautious approach.
Expats who are behind with their US tax filing can catch up using an IRS amnesty program called the Streamlined Procedure without facing any penalties by filing their last 3 tax returns, their last 6 FBARs (as applicable), and self-certifying that their previous non-compliance wasn’t willful avoidance.
Montreal is the fifth most popular destination in the world for US expats, with an estimated 45,000 Americans living in the city.
It’s easy to understand why. Montreal is a great place to live. Its culture and nightlife, infrastructure, cuisine, international mindset, and the high-quality free public services all serve to entice more Americans here than all but four other cities in the world.
Unfortunately for Americans living in Montreal though, US expats in Montreal are required to file both US taxes as a US citizen, and Canadian taxes as a Canadian resident.
Filing both tax returns needn’t be as complicated as many American expats living in Montreal at first think however. Most in fact end up not owing the IRS anything (although they still have to file).
Canadian taxes in brief
For expats whose only income is from employment in Canada, Canadian income tax is deducted at source and there’s no need to file a Canadian tax return.
The Canadian tax year is the same as in the US, Jan 1st to December 31st. For those who do have to file a Canadian tax return, Canadian returns are due by April 30th. Married couples must file Canadian taxes separately.
Canadian tax returns are filed to the Canadian equivalent of the IRS, the CRA (Canada Revenue Agency).
Expats have an automatic extension until June 15th to file their US tax return, with a further extension available upon request until October 15th. Any tax owed is still due by April 15th though.
While it’s always necessary to file, there are several exclusions that expats can claim that will reduce almost every expat’s US taxes owed to zero.
“Under Foreign Bank and Financial Assets Report obligations, Americans in Canada now have to submit a list of all of their bank accounts, brokerage accounts, company pension plans and some profit-sharing plans.” - the Globe and Mail
If expats living and working in Montreal pay more in Canadian income tax than the US tax they owe, it’s often more beneficial for them to claim the Foreign Tax Credit.
The Foreign Tax Credit offers US expats a $1 tax credit for every US dollar equivalent of tax that they’ve paid abroad. For expats in Montreal paying more Canadian tax than they owe to the IRS, this means that they can claim more US tax credits than the US tax that they owe, eradicating their US tax liability while giving them excess US tax credits that may come in handy in the future. Expats can claim the Foreign Tax Credit by filing form 1116.
For US expats earning under around $100,000 and paying less Canadian tax than the US tax due, the Foreign Earned Income Exclusion is often a better option.
The Foreign Earned Income Exclusion lets expats who can prove that they are either permanent residents in Canada, or that they spend at least 330 days outside the US in the year, exclude the first around $100,000 of their income from US taxes.
The Foreign Earned Income Exclusion can be claimed by filing form 2555.
Further US filing requirements for expats in Montreal
As well as filing a federal tax return, US expats in Montreal who have more than $10,000 in total in foreign bank or investment accounts at any time during the tax year are required to file an FBAR (Foreign Bank Account Report). Filing an FBAR means filing FinCEN form 114 online before October 15th.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
Because FBARs are filed to FinCEN rather than to the IRS, the penalties for not filing are much higher, so it’s important not to neglect FBAR filing, especially as almost all foreign banks and investment firms now provide the IRS with information about their US account holders directly.
Expats living in Montreal with financial foreign assets (but not tangible physical assets such as property, or cars for example) worth over $200,000 at any time during the tax year are required to report them by filing FATCA (The Foreign Asset Tax Compliance Act) form 8938 with their federal return.
Expats living in Montreal who need to catch up with their US tax filing
Expats who have been living in Montreal for a while but who didn’t know that they have to file US taxes can catch up by employing an IRS amnesty program that means they won’t face any penalties.
The amnesty program is called the Streamlined Procedure, and to qualify you have to file your last 3 tax returns, your last 6 FBARS (if required), pay any back taxes that you owe (often none, once you’ve claimed the most beneficial exclusions given your circumstances), and self-certify that your previous failure to file was non-willful.
The Streamlined Procedure is a great opportunity for expats living in Montreal who are behind with their US tax filing to become compliant before the IRS writes to them.
The American tax system is unusual compared to almost every other country in that the US taxes based on citizenship rather than on residence. So while most countries only those people who live in that country, and/or those who have income arising in the country, the US taxes all US citizens (and green card holders) on their worldwide income, wherever in the world they live.
To avoid double taxation (American expats paying income tax in both the country where they reside and to the US), the IRS has made available a number of exemptions, such as the Foreign Earned Income Exclusion, and the Foreign Tax Credit. Crucially though, these exemptions must be actively claimed by American expats when they file their annual US tax return declaring their worldwide income, meaning that even though they live abroad and most often won’t pay US taxes, Uncle Sam still keeps track of their finances.
Furthermore, Americans are required to declare their foreign bank and investment accounts if they have, in total, over $10,000 in them at any time during the tax year, by filing an FBAR (Foreign Bank Account Report).
FATCA (the 2010 Foreign Account Tax Compliance Act) meanwhile requires foreign banks to report their US citizen and green card holder account holders directly to the IRS, including their balance information. Combined with tax information sharing agreements with around 100 foreign governments, the IRS has access to in most cases a complete picture of expats’ finances.
It’s easy to understand why many US expats feel that Uncle Sam has overstepped its remit by snooping on their finances globally. This sentiment is even stronger though for Accidental Americans, from whom the IRS is also pursuing US tax compliance.
What is an Accidental American?
Accidental Americans are people, most often foreigners, who are entitled to American citizenship. Many may not even be aware of it.
So for example, children who are born in the US to foreign parents who were in the US temporarily are American citizens, even if they have another nationality and they have never had a US passport or returned to the US since they were a baby or child. (UK Government Minister Boris Johnson is a high profile example of this).
“The IRS currently has in place a streamlined program which allows ‘accidental Americans’ to get back into compliance by filing three years of tax returns and six years of FBARs and explaining their situations. But this streamline program remains open at the discretion of the IRS, so act fast.” - International Advisor
Similarly, Americans who have emigrated permanently and become a citizen of another country such as Canada but have never formally renounced their US citizenship may not realize that they are still American.
Lastly - and this can be the most complex scenario - descendants of Americans who married a foreigner and settled abroad permanently may be American.
Foreigners with one American parent are normally American. If these children of an American parent spend five years in the US studying or working at any point, their children will also be US citizens (or have the right to be, which is seen as the same thing by the IRS). In theory US citizenship could continue over multiple generations this way.
Lastly, foreigners who have worked or lived in the US in the past and so have a green card are also still required to file US taxes.
Between these different scenarios, there are potentially millions of Accidental Americans who may or may not be aware of their entitlement to US citizenship but are probably not aware of their obligation to file US taxes each year on their worldwide income.
Should Accidental Americans file US taxes?
Many commentators have suggested that Accidental Americans, when they become aware of the requirement to file US taxes, shouldn’t in fact do so, as the IRS has no way of enforcing US tax rules or penalties on them in their home country from across the world. In truth, it’s a little more complicated though, and it depends on each Accidental American’s individual circumstances.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
For example, if they want to travel to the US at any time in the future, it would be wise for them to file US taxes, as they may otherwise run into trouble upon arriving, such as finding that their US passport has been revoked.
Furthermore, the value of US citizenship for either them or their descendants may be a factor. By filing US tax returns (and claiming the exemptions that will in most cases exempt them from paying any US taxes), their children may have the possibility to claim US citizenship and so study, work, or live in the US in the future.
Another possible consequence of not filing is that is the IRS may tell their foreign bank that they owe US back taxes, their foreign bank may in turn refuse or limit services to them.
How can Accidental Americans catch up with their US tax filing?
Accidental Americans therefore have three choices: formally renounce their US citizenship, start filing US taxes, or do nothing, not travel to the US, and hope for the best.
The difficulty with the first option is that to renounce US citizenship Americans have to first be compliant with their US taxes, so they have to catch up with their US tax filing anyway. This may be the best long term option for some Accidental Americans though.
For those who want to catch up and retain the right to their US citizenship, perhaps thinking of the future opportunities and benefits that it may offer to them or their children, there is an IRS amnesty program called the Streamlined Procedure that allows them to catch up with their filing (including claiming the available exemptions) without facing any penalties.
In terms of not doing anything and hoping for the best, in the full knowledge that there may be limits or risks down the line, there may nonetheless be some Accidental Americans who are happy to live this way.
American expats are still required to file US taxes from abroad. This is because the US taxes based on citizenship, rather than on residence like most other countries.
While the tax treaties that the US has with around 100 other countries don’t alleviate expats from having to pay US taxes, the IRS has put in place some other mechanisms that do achieve this.
One of these mechanisms isn’t in fact related to double taxation, but simply allows expats to exclude the first around $100,000 of their earned income from US taxation. It is called the Foreign Earned Income Exclusion.
The Foreign Earned Income Exclusion - what are the rules?
The Foreign Earned Income Exclusion isn’t necessarily the best way for expats to avoid double taxation. Some expats may be better served by claiming the Foreign Tax Credit, which offers a $1 tax credit for every dollar of tax that they've already paid abroad. It depends on each expat’s circumstances, including their income level and whether and at what rates they are paying foreign taxes.
For those expats who will benefit from claiming the Foreign Earned Income Exclusion though, the first point to be aware of is that it isn’t applied automatically, so expats who don’t actively claim it will be considered by the IRS to owe back taxes, even if they’re paying foreign taxes abroad (and since FATCA, the IRS knows which expats should be filing a US tax return).
When claiming the Foreign Earned Income Exclusion on form 8938, expats must demonstrate that they are either a permanent resident in another country, or that they spent at least 330 days outside the US in the tax year (or in a 365 day period that overlaps with the tax year, for expats who moved abroad mid year).
“If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings.” - the IRS
This second test, known as the Physical Presence Test, is well suited to Digital Nomads, expats who live and work outside the US without settling in one foreign country. Expats claiming the Foreign Earned Income Exclusion using the Physical Presence Test should bear in mind the 330 day rule though when planning any trips back to the States.
What income qualifies to be excluded?
The most important points of reference when determining what income qualifies as being ‘foreign earned’ are whether it was actively (rather than passively) earned by the expat, and whether the expat was residing abroad when they earned it. As the IRS puts it, “Foreign earned income is income you receive for performing personal services in a foreign country.”
All types of actively earned income qualify, including self-employment income, salaries, wages, commissions, bonuses, professional fees, and tips.
It doesn’t matter where the income is paid, whether in the US or abroad, so long as the expat was residing abroad at the time.
Furthermore, non-monetary benefits provided by an employer for professional services the expat has carried out abroad also qualify, such as the fair market value of lodging, meals, the upersonal services in a foreign country.”
What Is FEIE? The Foreign Earned Income Exclusion | Bright!Tax - YouTube
Income types that are considered passive and so don’t qualify as foreign earned income include dividends, interest, capital gains, gambling winnings, alimony, social security benefits, pensions, and annuities.
Some types of income are a little more ambiguous, and sometimes qualify, depending on the circumstances. These include business profits (from sole proprietorships, partnerships, and corporations), royalties, and rents. In general, if the expat has actively earned these incomes during the tax year, they may qualify.
US expats who are behind with their US tax (and FBAR) filing because they weren’t aware that they had to file from abroad can catch up, including claiming the Foreign Earned Income Exclusion (or the Foreign Tax Credit) retrospectively, using the Streamlined Procedure IRS amnesty program without facing any penalties.
Expats in this situation are well advised to take advantage of this opportunity before the IRS writes to them though, as at that point they won’t be able to claim the Foreign Earned Income Exclusion or avoid penalties and back taxes.
The US has a citizenship based taxation system, meaning all US citizens (as well as green card holders) are required to file US taxes, wherever in the world they may reside.
This means American expats may find themselves having to file both US taxes as well as foreign taxes in the country where they live.
While the tax treaties that the US has with other countries generally don’t mitigate for this , there are several IRS exemptions that do, notably the Foreign Earned Income Exclusion and the Foreign Tax Credit, though expats must still file a federal US return to claim them.
US expats may also have to report their foreign financial accounts by filing a Foreign Bank Account Report, or FBAR.
Who must file an FBAR?
American individuals, corporations, partnerships and trusts that have a financial interest in or signatory authority over foreign financial accounts must file an FBAR if the total, combined value of the foreign accounts exceeds $10,000 at any time during a tax year.
Any account held at a foreign financial institution qualifies, including checking and saving accounts, brokerage accounts, securities accounts, and all types of investment accounts.
“United States persons are required to file an FBAR if they had a financial interest in or signature authority over at least one financial account located outside of the United States and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year.” - the IRS
FinCEN form 114 asks expats to provide details of all of their foreign financial accounts, including the institutions where the accounts are held, and the maximum balance held in each account during the tax year.
While FBARs have been a filing requirement since 1970, it’s only since the 2010 Foreign Account Tax Compliance Act (FATCA) that the IRS has been able to enforce FBAR filing.
FATCA requires foreign financial institutions (i.e. banks and investment firms) to report their American account holders to the IRS, including contact and balance information. Foreign financial institutions that don’t comply are subject to fines when they trade in US markets.
As all foreign banks trade in US markets, nearly all are now providing the IRS with this information - a total of around 300,000 to date.
Penalties for not filing FBARs are steep, starting at $10,000 per year, and as the IRS is now aware of who should be filing, it’s important to file to avoid penalties.
What Is FBAR? The Foreign Bank Account Report (FinCEN form 114) | Bright!Tax - YouTube
Catching up with FBAR filing
Expats who weren’t aware that they have to file FBAR and who should have been filing can simply back file them, so long as they haven’t been contacted by the IRS yet. If they have been contacted by the IRS, it may be more complicated, so we recommend that any expat who has been contacted by the IRS regarding delinquent FBARs should consult a tax attorney.
Expats who are behind with both their FBAR and federal tax return filing can either simply back file both if they are just one of two years behind. Expats who are three or more years behind meanwhile can catch up without facing penalties by using the Streamlined Procedure IRS amnesty program, again so long as the IRS hasn’t contacted them yet.
All Americans , including expats, are required to file US taxes, reporting their worldwide income. Many expats aren’t aware of this though, and when they find out they often feel shocked. The good news though is that while expats still have to file, there are several ways that they can reduce their federal taxes, often to zero, and avoid double taxation if they are paying taxes in their host country too. In this article we look at some of the specific ways that expats can reduce their US federal taxes
Some expats think that because they live abroad, they don't have to file, or that the IRS isn’t aware of them. Since FATCA (the 2010 Foreign Account Tax Compliance Act) though, the IRS is receiving information from almost all foreign banks and governments about US expats’ finances, so they know who should be filing. Penalties for not filing can be very steep, and when the IRS estimates that back taxes and penalties exceed $50,000 they can revoke expats’ US passports. So not filing is not a sensible way for expats to reduce or avoid federal taxes (in fact quite the opposite, as it can prove far more costly).
Thankfully however, expats who haven’t been contacted by the IRS yet can catch up without paying back taxes or penalties.
Expats who are just one or two years behind with their federal tax filing can simply back file these returns to get compliant. Expats who are three or more years behind meanwhile can consider catching up using the Streamlined Procedure IRS amnesty program.
Expats should also be aware that there are further filing requirements that affect many Americans living abroad, such as filing an FBAR (Foreign Bank Account Report), non-compliance for which can be very expensive.
“If you are a U.S. citizen or resident alien residing overseas, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension.” - the IRS
The Foreign Earned Income Exclusion
Claiming the Foreign Earned Income Exclusion allows expats to exclude the first around $100,000 of their earned income from US federal tax liability. Any earned income can be excluded, whether from employment or self-employment.
To claim the Foreign Earned Income Exclusion, expats must provide proof that they are either a permanent resident in another country, or that they spent at least 330 days outside the US in the tax year.
Expats can claim the Foreign Earned Income Exclusion by filing form 8938 with their federal tax return.
The Foreign Housing Exclusion
Expats who earn over around $100,000 and who rent their accommodation abroad can also claim the Foreign Housing Exclusion, which allows them to exclude more of their income up to a proportion of their housing expenses. The Foreign Housing Exclusion can also be claimed on form 8938.
Foreign Tax Credit
US Expats Tax Requirements Overview | Bright!Tax - YouTube
Expats who pay foreign taxes may be better off claiming the Foreign Tax Credit, which gives a $1 US tax credit for every dollar of tax already paid abroad. If the expat has paid more tax abroad than they owe to Uncle Sam, they can carry forward the excess credits to use in the future.
Expats can claim the Foreign Tax Credit by filing form 1116 with their federal tax return.
Child Tax Credits
Expats with children can potentially claim the Child Tax Credit (if they aren’t claiming the Foreign Earned Income Exclusion) or the Additional Child Tax Credit if they are (which may give them a refund if they owe no US taxes). Expats may also claim the Child and Dependent Care Credit to reclaim some childcare costs.
Taxes for expats are typically more complex than for Americans living stateside, so if you have any questions or doubts about your situation, our number one money saving tip is to consult an expat tax specialist, as in all likelihood they will save you more money than they charge.
Living abroad is an incredible and often life-changing experience. Americans living abroad are the new pioneers, venturing beyond the frontiers of the familiar to explore the wider world. At Bright!Tax, we talk to expats around the world every day, hearing their more often than not incredible stories of what they’re doing and how they came to live where they did. Many US expats use the opportunity provided by the global proliferation of high speed internet to record their adventures by blogging. Here we pick a selection of our favorite 5 US expat blogs in 2018.
Originally from Dallas, Helene and her husband relocated to Heidelberg, Germany, taking their two dogs, in early 2016. They chose Heidelberg as it’s a a small, interesting, affordable city, centrally located in Europe and in a country with a stable and strong economy.
Helene had already been blogging for a few years, so as an experienced blogger she not only blogs about her adventures in Europe but about how other expats can build a commercially viable blog, too, providing inspiration for expats worldwide.
David was already an established pastry chef in San Francisco before he decided to up his game and move to the pastry capital of the world, Paris, back in 1999.
“At the time, the word “blog” hadn’t been invented, nor had the concept. In 2004 however, about the time of my move to Paris, blogging software became available, which allowed me to post more frequently, and I turned my site into an official blog.” - David Lebovitz
David has been blogging for nearly 15 years. He writes about Parisian food and eateries, as well as posting his own new recipes. He’s also published 8 books, including ‘The Great Book of Chocolate’, and ‘The Sweet Life in Paris’. Essential reading for all foodie expats.
Heidi Wagoner fell in love with travelling when she went backpacking in her 20s. She and her husband subsequently lived in London for work before returning to the US to have children. They always wanted to live abroad again , but another foreign posting opportunity never arose, so when their children were seven and ten they decided to take matters into their own hands and moved to Spain.
The Wagoners (the whole family) blog about their adventures living in Spain and travelling in Europe and further afield. They also provide inspiration and services for other families who are thinking about taking the plunge and moving abroad.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
When Michelle moved to Vienna in 2014 after her husband was offered new job there, she took the opportunity to start a blog. With sumptuous photography, she describes life in one of Europe’s most majestic historic capitals, as well as on what’s different living in Europe compared to the States, and general advice for moving and living abroad.
Matt is one of the early adopting Digital Nomads. Originally from Boston, Matt packed up his life and set off to explore the world, working as he went, back in 2006. He has since spent time in over 80 countries. Matt makes a living from blogging about his travels as well as helping other people transition to a international life, as he did, from cubicle worker to globe-trotting Digital Nomad.
American expats are often justifiably upset at learning that they have to file a US tax return from abroad. This filing requirement also applies to anyone who has a green card. Furthermore, thanks to FATCA, a raft of information sharing agreements with foreign governments, and AI, the IRS is getting more and more sophisticated at knowing which expats should be filing and what they should be reporting.
Despite filing taxes as an expat typically being more complex than filing from the US, many expats choose to prepare their own US tax return. Here are some of the common mistakes they should aim to avoid.
1 - Copying a previous year’s return
Many expats turn to an expat specialist firm once, and then use that as a template that they can copy themselves the following year.
The problem with this approach is that US tax rules change from year to year, often in subtle ways For example, over the last few years tax bracket thresholds have risen a little every year, aong with the Standard Deduction and Foreign Earned Income Exclusion thresholds. In 2017 meanwhile, the FBAR filing deadline changed. The Trump Tax Reform Bill signals major changes for 2018 too tax year of course, and there may be things that can be done in preparation for the changes in 2017, depending on each expat’s particular circumstances. So simply assuming that US tax rules haven’t changed from year to year often proves a costly error.
2 - Reporting only US source income
In a way, it stands to reason that the US would only require American expats to report their US source income. While many other countries operate on this basis, the US requires that expats report their worldwide income and assets, regardless of whether the same income may already be liable to taxation abroad.
Thanks to FATCA and other bilateral international information sharing agreements, the IRS is now also able to know about expats foreign assets and income, so they know what most expats are earning and owning anyway.
“Many a dual country couple innocently starts filing U.S. taxes together, and that can be a very costly mistake. 95% of married couples file joint tax returns, often as a knee-jerk reaction.” - Forbes
3 - Incorrect claim for the Foreign Earned Income Exclusion
Many expats choose to claim the Foreign Earned Income Exclusion on form 2555 to exclude the first around $100,000 of their income (the exact figures changes a little each year) from US taxation.
Expats who file their own tax return often make several mistakes relating to claiming the Foreign Earned Income Exclusion though, including:
- the Foreign Earned Income Exclusion may not be the best option for them The Foreign Tax Credit for example may be a more beneficial alternative.
- expats often aren’t sure exactly which types of income do and don’t qualify.
- expats often get the proof of living abroad wrong, either incorrectly calculating their days spent in or outside the US, or not providing sufficient evidence to satisfy the Bona Fide Residence Test. Both of these errors can lead to a claim for the Foreign Earned Income Exclusion being denied, leaving an expat open to double taxation.
(Our mobile app accurately keeps count of how many days expats spend in the US, without them having to lift a finger. Download it for free here).
4 - Incorrect filing status
Expats married to a foreign spouse should think carefully about whether they check married filing jointly or separately on their US tax return.
Either can be more beneficial , depending on the circumstances. For example, if an expat’s foreign spouse isn’t earning, filing jointly can allow the expat to claim double the Standard Deduction and Foreign Earned Income Exclusion. If the foreign spouse is earning more or has foreign assets though, by filing jointly all their income and assets (including possible future ones) will be brought into US tax liability.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
5 - Missing items on an FBAR
Expats who have a total of over $10,000 in foreign bank and investments accounts at any time during the tax year are required to file a Foreign Bank Account Report, or FBAR.
Exactly which accounts qualify isn’t straightforward though. For example, accounts that an expat has signatory authority or any measure of control over, such as business accounts, qualify, even if not in the expats name. Similarly, any account that an expat benefits from in any way qualifies, such as those in the name of a trust.
6 - Not reporting foreign assets, investments, interests in foreign corporations and trusts, and gifts from foreign nationals or other foreign entities
There are a myriad of filing requirements for expats relating to foreign assets, investments, interests in foreign corporations (whether minority or majority interests), trusts, and gifts from foreign nationals (including a foreign spouse), foreign trusts, companies, and foundations .
Filing expat taxes is complex at the best of times, so we strongly recommend that expats with anything but the most simple of circumstances (and often even them, too) should turn to an expat specialist firm, who will typically save them more money than they charge, as well as ensuring that they avoid any fines.
The Foreign Account Tax Compliance Act (FATCA) was signed into law in 2010 with the aim of cracking down on tax evasion to increase tax revenue following the financial crisis.
FATCA contained two important measures that affect expats, a reporting requirement for expats who have financial assets abroad, and a reporting requirement for foreign banks (although this affects expats too).
FATCA financial asset reporting requirements for expats
FATCA requires expats with financial expats with a value over $200,000 per person (so $400,000 for married couples filing jointly) at any time during the year to report them to the IRS by filing form 8938 when they file their federal tax return.
Qualifying assets include all non-physical assets, such as stocks, bonds, savings, pensions with a cash balance, and the value of any businesses that expats may own (or part own).
Tangible, physical assets such as property (owned in the expat’s name), jewelry, art, and cars on the other hand don’t qualify for FATCA reporting on form 8938.
FATCA bank reporting requirements for expats
The second aspect of FATCA that affects expats is that it requires foreign banks to report their American account holders’ account details to the IRS each year, including contact and balance information.
FATCA achieves this by levying a steep tax on all foreign financial firms that aren’t complying when they trade in US markets. It has proven an effective strategy, as nearly all (around 300,000) foreign banks and other financial firms are now providing the IRS with their American account holders’ details.
Many expats only learn about this if they receive a letter from a foreign bank or investment firm asking them to confirm that they are fully up to date with their US tax filing.
FATCA's heart and soul comes from a vast array of agreements between America and foreign countries that implement this global financial disclosure law. It is a uniquely American law, yet FATCA now spans the globe with a network of reporting that is unparalleled in the world.” - Forbes
The idea of foreign banks sharing private information with Uncle Sam strikes many expats as a breech of privacy, however this is the interconnected world that we now live in. Most foreign governments have also signed tax information sharing agreements with the US, so that the IRS can access foreign tax filing information too.
This affects US expats because, although filing from abroad has been a requirement for Americans since the nineteenth century, now for the first time the IRS is able to enforce it, through having access to expats’ international banking and tax details thanks to FATCA.
In particular, the IRS can cross-reference this information with tax returns expats have filed (or see if they haven’t filed them), as well as information provided on FBARs.
FBARs, or Foreign Bank Account Reports, should be filed by expats who have just $10,000 in total in foreign banks or investment firms at any time during a tax year. Penalties for not filing FBARs are steep, starting at $10,000 per year, so expats are strongly advised not to neglect this filing requirement alongside their annual federal tax return, as FATCA has enabled global FBAR enforcement too.
How can expats catch up with their US tax filing?
Expats are by now no doubt appreciating the profound affect that FATCA has had in terms of allowing the IRS to know which expats are and aren’t filing and reporting their worldwide income and assets.
What Is FATCA? The Foreign Account Tax Compliance Act | Bright!Tax - YouTube
The good news is that there are ways for expats who are behind with their US tax filing to catch up without facing penalties (so long as the IRS hasn't contacted them yet).
Expats who weren’t previously aware that they should be filing US taxes from abroad who are just one or two years behind can simply back-file. Expats who are three or more years behind can catch up using an IRS amnesty program called the Streamlined Procedure, which also allows them to claim the IRS exemptions such as the Foreign Earned Income Exclusion and the Foreign tax Credit that allow them to avoid double taxation.
To catch up using the Streamlined Procedure, expats must file their last 3 tax returns, their last 6 FBARS (as appropriate), and self-certify that their previous non-compliance was non-willful, which is to say that they weren’t willfully avoiding filing and paying US taxes.
It’s tax time again, and many expats are discovering for the first time that Americans living abroad have to file a US tax return too, just as if they were living Stateside, reporting their worldwide income.
Americans who have been living abroad but haven’t been filing need to catch up to avoid possible penalties.
Most foreign banks and governments are now providing their US account holder and tax information directly to the IRS, so for the first time the IRS has global reach.
The best way for expats filing a US tax return late to catch up depends on their circumstances - whether they are just a little late, whether they need to file one of two years’ late returns, or whether they need to file three or more years’ late returns.
Extensions for expats
Expats have longer to file than Americans living in the US, so some expats may not be late after all. Although any taxes due are still due by April 15th, expats have an automatic filing extension until June 15th, and can request a further extension until October 15th.
Expats filing a US tax return one or two years late
Expats who have missed just one or two years US tax filing can simply back file their late returns.
When expats file US taxes, they can claim one or more exemptions that reduce or in many cases completely eliminate their US tax liability (although they still have to file to claim them).
“If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.” - the IRS
The primary exemptions are the Foreign Earned Income Exclusion, which allows expats to exempt the first around $100,000 (the exact figure rises a little each years to account for inflation) from US tax liability, and, for expats who pay foreign taxes abroad, the Foreign Tax Credit, which allows expats to claim a $1 tax credit for every dollar of tax that they’ve paid abroad.
Using one or more of the available exemptions, depending on their particular circumstances, expats can avoid double taxation on the same income. Please note that the tax treaties that the US has with other countries don’t achieve this - expats must claim the exemptions that most benefit them when they file their federal return from abroad.
Expats filing a US tax return 3 or more years late
Expats who need to file 3 or more years of US tax returns late to catch up can do so using an IRS amnesty program called the Streamlined Procedure.
So long as they do it before the IRS contacts them, the Streamlined Procedure lets expats catch up with their US tax filing without facing penalties and while still claiming the most beneficial exemptions.
To catch up using the Streamlined Procedure, expats must file their last 3 tax returns, their last 6 FBARs (if appropriate, see below), and self-certify that their previous failure to file was non-willful.
What Is The IRS Streamlined Procedure? | Bright!Tax - YouTube
Expats who have bank accounts or investments abroad may also have to file an FBAR, or Foreign Bank Account Report. FBARs are required if an expat has a total balance of at least $10,000 in foreign accounts at any time during the year.
FBARs should be filed online to FinCEN. When filing an FBAR, expats should report all their foreign bank and investment accounts, including accounts that the expat benefits from or has control over in any way, such as trusts’ and business accounts.
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