If
you are a US Citizen or green card holder you must file a US tax
return every year unless your taxable income is below a certain
threshold. Even if your income is below that threshold, you may
still be required to file certain forms to report foreign assets,
etc. Failure to file these forms can result in severe IRS penalties.
If you do not itemize your health, tax, interest, charitable and
miscellaneous deductions you get a standard deduction of $12,400
if single or filing as married filing separately or $24,800
if you file jointly with your
spouse.
As a
US expatriate living and working abroad 4/15/,21
your 2020
tax return is automatically extended until 6/15/21
but any taxes due must be paid by 4/15/20
to avoid penalties and interest. The return can be further extended
until 10/15/21
if the proper extension form is filed. An even further extension
until December may be available if the proper letter is sent to the
IRS.
✦ For
2020
if you are a qualified expatriate you get a foreign earned income
exclusion (earnings from wages or self employment) of $107,600,
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. This exclusion only
applies to income taxes and does not apply to US self-employment
tax (social security plus medicare). You spouse who lives and works
abroad with you will also be able to use this exclusion against any
earned income they have abroad. You can lose this exclusion if you
file your return more than 18 months late. The exclusion can only be
claimed on filed tax return and does not apply if you fail to file a
tax return.
✦ If
you receive a gift of $100,000 or more during 2020 from a nonresident
individual or nonresident corporation you must file form 3520 to
report that gift. If you fail to file that form you will incur
substantial penalties. .
✦ 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 non-deductible
amount.
There is a limit to the housing amount and certain “high-cost”
locations there is a higher amount of housing expense which can be
considered. (For “high-cost”
country
limitations see Form 2555 instructions).
✦ You
get credits against your US income tax obligation for foreign income
taxes paid to a foreign country but you must file a US tax return to
claim these credits. This avoids double taxation of the same income.
✦ If
you own 10% or more of a Foreign corporation or Foreign partnership
(LLC) you must file special IRS forms,
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
(medicare and social security) of 15.3% which cannot be reduced or
eliminated by the foreign earned income exclusion or
foreign tax credits.
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 the equivalent of social
security
in
that country.
✦ Forming
the correct type of foreign corporation and making the proper US tax
election (to cause the income and foreign taxes
the foreign corporation pays to flow through to your personal US tax
return) 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 and only
certain types of foreign business entities are eligible to make this
election.
✦ 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 114 with the IRS
by October 15, 2021
for
the 2020
calendar year or incur a penalty of $10,000 or more including
criminal prosecution. Foreign financial accounts often include
accounts in you sign on for a foreign corporation, foreign
partnerships foreign pension plans, stock brokerage accounts, and
cash surrender value of foreign life insurance. This form does not
go in with your personal income tax return and can
only be filed separately on the web at:
http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html
✦ 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 file
US returns but are US residents or citizens.
✦ Often
due to foreign tax credits and 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 a
special program 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 worldwide 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 8938 on time can result in a penalty of
$10,000. The form is complex and has different rules that apply to
you if you live abroad or live in the US. This form is required in
addition to the FBAR form 114.
✦ 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. For 2018 a new
tax was enacted with the acronym of GILTI tax. This may or may not
cause an
owner of a
Controlled Foreign Corporation (CFC)
to owe taxes on the income it does not distribute to its owners. This
GILTI tax applies to 10% or more owners of CFCs.
✦ If
you own investments in a foreign corporation or own foreign mutual
fund shares you may be required to file the IRS form 8621 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.
There
are many more special tax laws too numerous to mention here that
apply to expatriates, green card holderd.
nonresidents
and US taxpayers with foreign assets, businesses, etc. Please need
to consult with Kauffman Nelson LLP
if you have other offshore matters to be certain what is required to
be filed.
Download
your
2020
Expatriate Tax Questionnaire HERE
Send
us your completed questionnaire and we will immediately provide you
with a flat fee quote for preparing your return(s).
Don
D. Nelson, US Tax Attorney, Charles Kauffman CPA, Kauffman Nelson,
LLP, CPAs
Huntington
Beach, California USA
US
Phone: (949) 480-1235, US Fax: (949)
606-9627
Email:ddnelson@gmail.com
or ustax@hotmail.com
Skype
address: dondnelson
Visit
our International Tax Blog for the Latest Expat and International Tax
Developments at www.usexpatriate.blogspot.com
/
http://us-mexicantax.blogspot.com/
We
have been preparing tax returns and assisting US clients located in
over 123 countries around the the world for over 35 years. We also
assist US Nonresidents meet their US tax obligations and return
filing requirements. Email, skype or phone us for immediate
assistance.
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