Six Mistakes US Expatriates Make About IRA Contributions

Wall Street Journal's excellent article on potential problems with IRA s for expatriates.

Tax Extensions, Penalties and Due Dates for US Expatriates

• Though expats get an automatic extension to file until June 15th, 2013, for their 2012 tax return, if any taxes are owed they must pay those in by April 15th, 2013 to avoid penalties and interest.
• Expats can get a further extension of time to file their 2012 return up to October 15th, 2013 by filing form 4868 prior to 6/15.
• Your FBAR (TDF 90-22.1) for required for reporting foreign financial accounts (including bank accounts, many foreign pension accounts, foreign stock brokerage accounts, and other various foreign financial accounts) must be received by the IRS by June 30th , 2013 for the 2012 year. It cannot be extended for any reason.  The penalty for late filing can be $10,000 or more.
• In most instances, if you need to amend an income tax  return to report unreported income or expenses it can be done up to three years from the date it was originally filed.
• The statute of limitations never runs out on any tax year until you file a tax return for that year. Best to always file a tax  return to cause this statute to run out.
• You have until 4/15 to open your IRA and fund it even though your tax return is extended for 2012. Remember you must have earned income in excess of the foreign earned income exclusion you take on Form 2555, in order to even be eligible to make a regular IRA or Roth IRA contribution.  You are also limited by your total income or if covered by a US corporate pension plan.
• Penalties:
• The late filing penalty is 5 percent per month of all unpaid taxes due with the return when finally filed up to a maximum of 25 percent.  If you file late, but have already paid in all taxes due, you will incur no penalty.
• The  Late payment of tax penalty is 1/2 percent per month and interest that is adjusted quarterly which has been running at 2 to 3 percent per annum.
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ROTH IRAs ARE GREAT FOR US EXPATRIATES THAT QUALIFY - SEE THE RULES BELOW.

• Roth IRAs (if you qualify based on your income) are ideal for US expatriates because due to the foreign earned income exclusion and credits for foreign income taxes paid, they often owe little or no tax on their US tax return. A regular IRA results in a deduction an expatriate may not need in that situation.
• You cannot make Roth  IRA contributions unless your earned income for the tax year exceeds the foreign earned income exclusion taken in that year.  If your earned income does does exceed your foreign earned income exclusion, you can make a Roth IRA contribution limited only by the maximum allowed and the amount your earned income exceeds your foreign earned income exclusion if less than the maximum contribution allowed.
• You also cannot make an Roth IRA contribution if your  modified adjusted gross income exceeds a certain amount.  That amount  (which is lower if you are covered by a US pension plan and is  much higher if you are not covered by a US pension plan) is set forth in Publication 590 (on pages 62 and 63 )  which can be downloaded below.  If your modified adjusted gross income exceeds this maximum you cannot contribute to an IRA.  To determine that phase out amount you must add back the  foreign earned income exclusion you took on your tax return and use formula set forth in Publication 590.
• If you over contribute to an Roth IRA (more than is allowed under the law), you will not be penalized if you withdraw that contribution on or before  the due date of your tax return.                                You can also in most situations  notify the IRA administration  company to have that contribution re-designated to your subsequent tax year.
• The maximum contribution is $5000 for 2012, and $6,000 if you are over 50.  You may also be able to make a contribution for your spouse in the same amounts subject to certain limits.
• You must make the contribution and open the Roth IRA no later than April 15th following the end of the calendar year.
• Roth IRA contributions may be withdrawn at any time without taxes or penalties; earnings may be withdrawn tax-free and penalty-free once you reach age 59½ and the account has been open for at least five years.
• Roth IRA Earnings may be subject to taxes and penalties if distributed before age 59½ and before the the contributions included in the distribution are at least five years old.

• There is a 6 percent penalty per year for over contributions
• We have noted one of the biggest mistakes made by expatriates is contributing money to regular IRAs (deductible) or Roth IRAs  when they are eligible under the rules above. The penalties for these over contribution can become extreme.
• Publication 590 contains all of the IRA complex rules. Download it here.
  
  

Let us know if you need help with your 2012 expatriate or international taxes. Visit our website at www.TaxMeLess.com . Email us at ddnelson@gmail.com