Are You Moving Overseas? 7 Tax Tips For American Expats

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Are You Moving Overseas? 7 Tax Tips For American Expats

Are You Moving Overseas? 7 Tax Tips For American Expats

Are You Moving Overseas?

Two of the most complicated aspects of being a U.S. expat and living in a foreign country are dealing with the United States tax requirements and immigration implications of moving overseas. When a U.S. person lives in a foreign country, it is typically referred to as being an ‘expat’ — and generally this includes U.S. citizens and Lawful Permanent Residents. It may also include foreign nationals who meet the substantial presence test, but oftentimes they can avoid many of these issues by simply not meeting the substantial presence test. The immigration and tax issues for U.S. citizens and lawful permanent residents can be very complicated. And, when a U.S. expat gets ready to move overseas, they must understand the different immigration and tax components, so they can properly prepare and are not surprised after they leave the United States. This is especially important for lawful permanent residents who still have United States residence requirements to keep their green card status valid. Let’s walk through some of the basics of the United States tax and immigration aspects for US expats moving overseas with seven tips.

Worldwide Income for Citizens and Certain Residents Abroad

The first thing that U.S., expats must keep in mind when they live overseas is that the United States follows a Citizenship-Based Taxation income model and not a Residency-Based Taxation income model for individuals. This means that U.S. persons are subject to United States tax on their worldwide income. It does not matter if the taxpayer is living overseas in a country that does not tax personal income tax and/or whether the taxpayer already paid foreign taxes. The taxpayer may still qualify for the foreign earned income exclusion or foreign tax credits – but from a baseline perspective, all of the foreign income is still reported on the U.S. tax return.

Treaty Election (non-US Citizens)

If the taxpayer is a U.S. expat living in a foreign country that is considered a treaty country, then non-U.S. citizens typically may qualify to make a treaty election to be treated as a foreign person for tax purposes. This means that the taxpayer is not considered a U.S. person for tax purposes and they only have to report their US-sourced income instead of their worldwide income on a Form 1040-NR instead of Form 1040. In addition, the taxpayer may be able to circumvent certain international information reporting requirements, so taxpayers may want to consider these options if they live overseas. Noting, that there are some tripwires to be cognizant of if the taxpayer is already a long-term lawful permanent resident under the U.S. expatriation definition.

Green Card and Reentry Permits

For taxpayers who are considered U.S. expats but are lawful permanent residents, they have an annual residence requirement to remain in the United States for about six (6) months each year. If they do not reside in the United States for at least six months in the year when they reach the port of entry when they are trying to return to the United States they may be turned away — and their green card may be confiscated. In recent years, the ports of entry have become much more strict, so taxpayers must be aware of these risks if they have been out of the country for more than six months in the current year. Also, some taxpayers may qualify for a reentry permit, which is an immigration tool that allows taxpayers to live outside of the United States for more than six months in a year without risking losing their green card. 

Foreign Earned Income Exclusion

When a taxpayer lives and work overseas, they may qualify for a foreign earned income exclusion for their ‘earned’ income. Currently, the foreign earned income exclusion is $120,000+, which means that taxpayers can exclude this income from their U.S. tax return. What is very important to note, is that it does not mean that the taxpayer is exempt from having to file their return if they earn less than $120,000 a year, but rather they still have to file their tax return — including the foreign income — and then may exclude a portion of the income up to $120,000 if they qualify by filing IRS Form 2555.

Foreign Tax Credits

Taxpayers who have already paid foreign taxes may qualify for foreign tax credits against any U.S. tax liability that would be on their foreign income. There are different buckets of foreign tax credits, and some taxpayers benefit by using foreign tax credits for earned income and passive income, while some taxpayers rely on foreign earned income exclusion for their earned income and foreign tax credits for other income. If the taxpayer is considered a high-income earner, then they may be able to use a hybrid formula to include both foreign earned income exclusion and foreign tax credits for their earned income, but they cannot double dip.

Totalization Agreement

Unfortunately, some taxpayers who live and work overseas may have to pay into multiple Social Security systems. For example, a self-employed taxpayer living in a non-totalization country may have to pay into that country’s social security system as well as the United States’s social security system. The United States has entered into about 25 totalization agreements in which taxpayers only have to pay into one social security system depending on where they work, and whether their employer is considered foreign or domestic.

FBAR, FATCA, and More International Reporting

In addition to the onerous tax rules, the United States has a very complicated international information reporting system, which requires U.S. persons to report foreign accounts, assets, and investments on various international tax forms such as the FBAR and Form 8938. The different rules depend on whether or not the taxpayer is considered a U.S. person for tax purposes or not, and there are certain exceptions, exclusions, and limitations from having to file noting, the IRS may challenge any tax position that the taxpayer claims in which they do not file these forms. Since the failure to file these forms can result in significant fines and penalties, taxpayers should be aware of any risks they are taking when making any elections or taking any positions in which they claim they do not have to file these forms.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.