15 US 2012 Tax Facts for Americans Living and Working Abroad

By Don D. Nelson, Attorney, C.P.A.

Kauffman Nelson LLP

If you are a US Citizen you must file a US tax return every year unless your taxable income is less than $15,700 - for a joint return or $ 9,750 - for a single return (these amounts are for 2012 and are lower amounts for earlier years) or have self employment-independent contractor net self employment income of more than $ 400 US per year. You are taxable on your worldwide income regardless of whether you filed a tax return in your country of residence. You must file a tax return each year if you income exceeds the amounts stated above even if you owe no tax.

• As an US expatriate living and working abroad 4/15, your 2012 tax return is automatically extended until 6/15 but any taxes due must be paid by 4/15 to avoid penalties and interest. The return can be further extended until 10/15/10 if the proper extension form is filed.

• For 2012 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $95,100, but this exclusion is only available if you file a tax return. You must qualify under one of two tests to take this exclusion: (1) bonafide resident test or (2) physical presence test. You can read more about how to qualify in IRS Publication 54.

• If your spouse works and lives abroad, and is qualified, she or he can also get at $95,100 foreign earned income exclusion.

• If your foreign earnings from wages or self employment exceed the foreign earned income exclusion you can claim a housing expense for the rent, utilities and maintenance you pay if those amounts that exceed a minimum amount of $15,216 up to a maximum amount which varies by your country of residence.

• You get credits against your US income tax obligation for income taxes paid to a foreign country but you must file a US tax return to claim these credits.

• If you own 10% or more of a Foreign corporation or Foreign partnership (LLC) you must file special IRS forms each year or incur substantial penalties which can be greater including criminal prosecution if the IRS discovers you have failed to file these forms.

• If you create a foreign trust or are a beneficiary of a foreign trust you may be obligated to file forms 3520 and /or 3520A each year to report those activities or be subject to severe penalties. Foreign foundations and non-profits which indirectly benefit you may be foreign trusts in the eyes of the IRS.

• Your net self employment income in a foreign country (earned as an independent contractor or in your own sole proprietorship) is subject to US self employment tax of 15.3% (social security) which cannot be reduced or eliminated by the foreign earned income exclusion. The one exception is if you live in one of the very few countries that have a social security agreement with the US and you pay that countries equivalent of social security.

• Forming the correct type of foreign corporation and making the proper US tax election with the IRS for that corporation may save you significant income taxes and avoid later adverse tax consequences. You need to take investigate this procedure before you actually form that foreign because it can be difficult to make that election later.

• If at any time during the tax year your combined highest balances in your foreign bank and financial accounts (when added together) ever equal or exceed $10,000US you must file a FBAR form with the IRS by June 30th for the prior calendar year or incur a penalty of $10,000 or more including criminal prosecution. This form does not go in with your personal income tax return and is filed separately to a different address.

• In the past several years the IRS has hired thousands of new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms. These audits have begun and will increase significantly in the future. The IRS gets lists of Americans applying or renewing for US passports or entering the country. They will compare these lists with those who are filing US income tax returns and take action against those who do not.

• Often due to foreign tax credits and the the foreign earned income tax expats living abroad who file all past year unfiled tax returns end up owing no or very little US taxes. The IRS has several special programs which will help you catch up if you are in arrears which will reduce or possibly eliminate all potential penalties for failing to file the required foreign asset reporting forms. We can direct you to the best program for your situation, prepare the returns and forms and represent you before the IRS.

• Beginning in 2011 a new law went into effect which requires all US Citizens report all of their world wide financial assets with their personal tax return if in total the value of those assets exceed certain minimum amounts starting at $50,000 . Failure to file that form on time can result in a penalty of $10,000.

• Certain types of income of foreign corporations are immediately taxable on the US shareholder's personal income tax return. This is called subpart F income. The rules are complex and if you own a foreign corporation you need to determine if these rules apply to you when you file the required form 5471 for that corporation.

• If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS forms for owning part of a Passive Foreign Investment Company (PFIC) or incur additional, taxes and penalties for your failure to do so. A PFIC is any foreign corporation that has more than 75% of its gross income from passive income or 50 percent or more of its assets produce or will produce passive income.

Download your 2012 US tax return questionnaire prepared expressly for Americans living abroad at www.TaxMeLess.com or at www.ExpatAttorneyCPA.com Please send us your completed questionnaire for a fixed fee quote for the preparation of your return.

Don D. Nelson, US Attorney, CPA

Kauffman Nelson LLP

Dana Point, California 92629 USA

US Phone: (949) 481-4094, US Fax: (949) 218-6483

Email:ddnelson@gmail.com

Skype: dondnelson

Visit our International Tax Blog for the Latest Expat and International Tax Developments at www.usexpatriate.blogspot.com.

We have been preparing tax returns and assisting US clients located in over 50 countries around the the world for over 30 years. We also assist US Nonresidents meet their US tax obligations and return filing requirements. Email, skype or phone us for immediate assistance. We offer mini consultations (with attorney client privilege) to answer your tax questions and resolve your tax issues.

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Disclaimer and Conditions: The information contained herein is general in nature and is not to be construed or relied on as tax or legal advice with respect to you individual tax situation or questions. Your use of this material does not create any attorney/CPA relationship between you and this firm or any other obligation. You are advised to retain competent tax professionals help with your individual tax matters and for appropriate answers your specific tax questions.

2012 Foreign Earned Income Exclusion Increased By IRS

The IRS for 2012 has increased the Expatriate Foreign Earned Income Tax Exclusion to $95,900.  This could save single person (without any available tax credits)  up to an additional.$616 in US taxes on their 2012 return over what they might pay on the same foreign earned income on their 2011 return.

Remember an an expatriate living abroad on 4/17/12 you got an automatic extension to file your return until 6/15/12.  You can get a further extension to file the return until 10/15/12 by filing form 4868 prior to 6/15. If you owe any taxes at that time  interest and penalties will continue to accrue (at a rather low rate) until those taxes are paid. Remember form TDF 90-22.1 (FBAR) must be filed to report your foreign financial accounts by 6/30/12 for 2011. It cannot be extended for any reason.

This combined with the fact the IRS increases the foreign housing exclusion or deduction each year for expats will provide additional benefits to those who live and work abroad for 2012.  It just keeps getting better for expatriates so long as all of the special reporting forms (with high penalties for not filing) such as TDF 90-22.1, 8938, 3520, 8865, 5471, etc. are all filed in a timely manner. It is noteworthy that none of these forms are actual forms that produced more taxes, they are strictly informational and if filed, will result in no adverse consequences to the expat taxpayer.  Read more on our website at www.TaxMeLess.com 

TIPS FOR US EXPATRIATES ON PAYING QUARTERLY ESTIMATED TAXES

You may need to pay estimated taxes to the IRS during the year if you have income that is not subject to withholding and will not be completely  offset by foreign tax credits or the foreign earned income exclusion. Your first quarterly estimated is due on 4/17/12 for 2012. 

These six tips explain estimated taxes and how to pay them.

1. If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax.

2. As a general rule, you must pay estimated taxes in 2012 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and 2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return. Special rules apply for farmers, fishermen, certain household employers and certain higher income taxpayers.

3. For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

4. To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, for this. You want to be as accurate as possible to avoid penalties. Also, consider changes in your situation and recent tax law changes.

5. The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates generally are April 15, June 15, Sept. 15 and Jan. 15 of the next or following year.

6. Form 1040-ES, Estimated Tax for Individuals, has everything you need to pay estimated taxes. It includes instructions, worksheets, schedules and payment vouchers. However, the easiest way to pay estimated taxes is electronically through the Electronic Federal Tax Payment System, or EFTPS, at www.irs.gov. You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

For more information on estimated taxes, refer to Form 1040-ES and its instructions and Publication 505, Tax Withholding and Estimated Tax. We can help you compute your 2012 estimated taxes and send you the necessary forms to make the payments.

NOTE: Remember that expats living abroad on 4/17/12 get an automatic extension of time to file their US tax returns until 6/15/12, but if they will owe taxes they must pay in the tax by 4/17/12 in order to avoid penalties and interest.

2012 Proposed New Tax Laws from the President

You can read  the 200 pages of proposed new tax laws from the President some of which will not doubt be enacted in 2012  HERE.  Better act fast to beat some of these changes which may not be favorable to you.