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Want to retire overseas? Here’s everything you need to know about tax


U.S. citizens move abroad for a variety of reasons – better quality of life in retirement, career opportunities, exploration or love of a particular person or place – but all foreigner shares a very important trait: the sense of adventure.

However, the overseas move includes a plethora of logistics plans and financial considerations that should always be near the top of the list, including the requirement that US citizens still have to pay U.S. taxes after they move out of the country. out.

US tax regulations for US citizens living abroad

The United States has a citizenship-based taxation system. This is the only developed country to have this tax system, rather than a system based on residency or territory.

The residence-based tax system only taxes residents in that country, while the territory-based system only taxes income and economic activity in that country, regardless of whether the income is earned by residents or not. On the other hand, the United States taxes all US citizens, wherever they may be in the world.

This raises many questions for US citizens abroad: What if they also have to pay foreign taxes in their host country? Would a tax treaty protect them from double taxation? What about the Social Security tax?

US citizens living abroad do two tax returns are required if the host country requires them to file, and, even though the United States has tax treaties with more than 60 other countries, they do not prevent overseas US citizens from filing.

However, they have ways that expats can avoid double taxation. The most common way is to claim tax credits when they file taxes in the United States instead Foreign tax they have to pay abroad.

The most common way to do this is for foreigners to pay their foreign taxes first and then their US taxes. When they file US taxes, they file an additional form (Form 1116) to claim the US Foreign Tax Credit.

In some cases, US citizens abroad will file their U.S. taxes first and then claim the overseas tax credit, if their income is considered to be of US origin, for example.

Specific tax treaties allow certain types of income to be exempt from U.S. tax under certain circumstances, usually pensions, dividends or royalties, depending on the tax treaty. Foreigners wishing to take advantage of a specific tax treaty provision must request that on Form 8833 when they file a tax return in the United States.

In addition, the United States has a so-called term Exclude income with foreign income, which can be requested on IRS Form 2555. In 2021, it allows US citizens abroad to simply exclude the first $ 108,700 (the exact amount changes each year) from earnings from US taxes. This provision is useful for foreigners who are not eligible to pay foreign tax abroad, or foreign taxpayers at a rate lower than the US tax rate (and those who claim Foreign Tax Credit will still owe US ​​tax).

In terms of Social Security taxes, the United States has so-called aggregate agreements with several countries which means that U.S. citizens living in one of these countries will only have to pay Social Security taxes for United States or their host country, depending on the timing. they plan to live abroad. US citizens in other countries who are self-employed or employed by a US company may find themselves at double the risk of being taxed on Social Security.

The countries to which the United States has signed a general agreement are Australia, Austria, Belgium, Brazil, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greek, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Korea, Spain, Sweden, Switzerland, and UK Uruguay.

Overseas US citizens must also report their registered overseas business interests.

US citizens living abroad receive automatic filing extensions until June 15, although any taxes they owe will still need to be paid by April 15. Those who need more time to file Applications after June 15 can also request an extension up to October 15 by filing Form 4868.

FBAR report

FBAR stands for Foreign Bank Account Report. Filing the FBAR is an additional US reporting requirement for many US citizens living abroad.

The FBAR report affects US citizens with financial accounts registered abroad, whether they live in the US or abroad. Foreign financial accounts include any type of account with a positive balance, including all bank accounts and most types of investment and personal retirement accounts.

Whether U.S. citizens with financial accounts registered abroad are required to submit FBAR depends on whether the total balance of all their eligible accounts exceeds $ 10,000 total at any given time. point of the year or not. So an American with 10 qualifying accounts that all have $ 1,001 in it – even for a few minutes – will have to file FBAR to report all of their foreign financial accounts.

Eligible accounts also include any accounts that a US citizen has authority to sign, such as joint accounts and business accounts, even if the account is not registered under the name of surname.

FBAR filing requirements were introduced as part of the Tax Privacy Act of 1970 to help prevent offshore tax evasion. It is somewhat controversial, however, that the $ 10,000 threshold has never been raised with inflation.

FBAR is filed with FinCEN, the financial crime regulator, instead of the IRS, meaning the penalties for not filing the FBAR will be much higher. These amounts start at $ 10,000 a year for unintentional omissions or unintentional omissions or errors on the form.

The penalty for willful, willful evasion of FBAR can be up to $ 100,000 a year or half the balance of all foreign accounts. There have been FBAR fines in the millions, notably that of former presidential adviser Paul Manafort.

The FBAR form itself is Form 114 FinCEN and it must be submitted online by April 15. However, there is an automatic filing grace period until October 15 to match the FBAR submission date. US tax return filing deadline.

FinCEN Form 114 is submitted on the FinCEN website through the BSA filing system. This is not a complicated form to submit, as long as you have the relevant financial account statements available. The information the form requires includes the name and address of the financial institution, name and account number, as well as the maximum account balance for the year for each qualifying foreign financial account.

FATCA reporting

Since the request was made, many US citizens living abroad have neglected to file the FBAR because they did not know about the request, or because they believe the IRS has no way of knowing what’s in the country account. out of them and so they won’t find them.

This was in fact the case until 2010, when the Foreign Account Tax Compliance Act was enacted into law. Often referred to as FATCA, the law includes two provisions affecting foreigners.

First, it promotes U.S. global financial hegemony by forcing every foreign bank and investment firm to provide the U.S. Treasury Department with personal and account information (including balances. ) of account holders who are US citizens. Non-compliant financial firms will be subject to high taxes on transactions they conduct in the US financial markets.

As a result of this, almost every financial company globally currently provides the United States with this information, allowing the IRS to check that information against information provided on the FBAR or to see if the FBAR should be filed but not.

The fact that many US citizens with overseas financial accounts have not submitted the FBAR remain unrelated is due to the sheer volume of information the IRS is receiving. For this reason, so far, it has focused on giving examples of high net worth US citizens. Now, however, it is developing software to better organize the information it is receiving.

FATCA also created a new filing requirement for US citizens with foreign financial assets. This means that US citizens living abroad with a total of over $ 200,000 worth of overseas financial assets must report them at any time of the year by filing Form 8938 IRS as part of their US federal tax return. (Note that the application threshold varies depending on application status and overseas residency.) Foreign financial assets include bank accounts and investment accounts, as well as individual retirement accounts. foreign investments and investments in foreign businesses.

That’s because there is a certain amount of cross between the FATCA and FBAR reporting requirements that they are often mentioned together, and there is some confusion about them.

Because it has a lower threshold of account values, more U.S. citizens are required to file an FBAR than a Form 8938 IRS. U.S. citizens, however, meet the minimum account and asset values ​​for both Both Form FinCEN 114 and Form IRS Form 8938 must be submitted.

Seek advice

U.S. citizens living abroad almost always benefit from seeking advice from a US foreign tax professional to ensure that they are not only complying and complying with but also filing for the benefit of their best interests.

With the additional forms involved (and often currency conversion), filing from abroad is more complicated than filing in the United States.

U.S. citizens who live abroad and haven’t paid U.S. taxes because they don’t know they have to, can catch up without facing IRS amnesty penalties, as long as they do as so before the IRS contacted them about it.

This story was originally posted on International Living.

Allyson Lindsey is a Management CPA and Partner at Bright! Tax is the leading foreign tax expert. Light! Tax is a leading provider of alien tax services to US citizens living abroad.

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