Tax Considerations for U.S. Citizens Working or Living Abroad
American citizens and green card holders (lawful permanent residents) who live abroad, or earn income from foreign sources, face unique tax issues. If you fall into either category, it’s important to understand how the tax law applies to you so that you can stay in compliance and minimize your tax liabilities as part of your long-term financial planning.
U.S. TAX FILING RESPONSIBILITY
The United States is one of the very few countries requiring its citizens and long-term permanent residents to file U.S. tax returns reporting their worldwide income regardless of where they live and earn their money. So, if a U.S. citizen moves to another country, earns all income in that foreign country and has all assets in that foreign country, he still is required to file a U.S. tax return. A green card holder continues to be treated as a U.S. taxpayer if he leaves the U.S. and loses immigration status. U.S. tax filing responsibilities continue unless the green card is formally relinquished and the IRS is notified. U.S. persons living and working abroad will have tax filing responsibilities in the country of residence and in the U.S. There are several mechanisms which can eliminate or reduce double taxation of the same income. Two of the most common ways to mitigate double taxation are the foreign earned income exclusion and the foreign tax credit.
■ If the taxpayer has a bona fide residence in the foreign country or has been in the country for 330 out of 365 days, up to $104,100 (2018 threshold) can be excluded from U.S. income. If housing costs are above a certain threshold, some housing expenses can also be excluded, if paid by the employer.
■ The taxes paid in the foreign country can be utilized as a tax credit on the U.S. return, so that the taxpayer does not pay taxes in both countries, but ends up paying the higher tax.
In addition to reporting worldwide income on a U.S. tax return, the taxpayer must comply with complex asset reporting requirements. If the taxpayer has more than $10,000 in foreign accounts on any day during the year, he must file a Form FinCEN 114 (FBAR) with the U.S. Department of the Treasury each year. Foreign accounts include foreign bank accounts, brokerage accounts, mutual funds, unit trusts, bonds issued by a foreign entity, pensions, cash value of life insurance, and loans to foreign persons. If account balances exceed the specific thresholds listed below, the foreign assets must also be reported on Form 8938 “Statement of Foreign Financial Assets”, which is filed with the tax return.
■ Married, filing joint return – assets of $400,000 on the last day of the year or $600,000 on any day during the year.
■ Single – assets of $200,000 on the last day of the year or $300,000 on any day during the year.
Note that these thresholds are different if the taxpayer moves back to the US before the end of the year.
Taxpayers must also report interests in foreign partnerships, disregarded entities, and privately-held companies. Depending on the ownership percentages, detailed financial information about the company may be required.
Key Tax Considerations When Working Abroad
■ What are the filing requirements?
■ What is your tax liability?
■ What happens when you return to the U.S.?
■ What should you do if you are not in compliance?
Sometimes tax treaties and other mechanisms are not enough to protect a worker from additional taxes during an international assignment. Many large multinational corporations have a tax equalization policy, under which the company pays any taxes above what the employee would pay in their home country. If you are considering working overseas, be sure to ask if your company offers tax equalization. Interestingly, this could work both ways – the tax burden in some countries could actually be lower than in the U.S. Use a tax professional to help you understand the tax rules in the country you are considering moving to.
Some employers also pay tax professionals to help workers comply with international tax laws. Employees who choose to leave the company in the middle of an international assignment should remember that they will need to hire their own accountant to complete their tax returns.
DISCLOSURE OF GIFTS OR INHERITANCES FROM NON-U.S. PERSONS
Although there is no U.S. tax on gifts or inheritances received by U.S. persons from non-U.S. persons or foreign estates, there is a requirement to disclose the transaction. If total gifts or inheritances received in a calendar year exceed $100,000 in money or property, then a Form 3520 “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts” must be filed reporting the receipt.
AVOID PENALTIES FOR NONCOMPLIANCE
Failure to comply with U.S. reporting requirements can trigger significant penalties. For example, failure to file Form FinCEN 114 (FBAR) can trigger a penalty of $10,000 per account, up to 50% of the year-end account balance. Similarly, a tax filer may be assessed a penalty of $10,000 for failing to file a required information return. Failure to report foreign gifts and inheritances can result in penalties of up to 35% of the reportable amount.
WHAT SHOULD YOU DO IF YOU ARE NOT IN COMPLIANCE?
As with any tax dispute with the IRS, it’s important to consult an experienced tax professional or attorney if you discover that you have not complied with international tax guidelines. The IRS has several voluntary disclosure programs which can limit penalties while allowing the taxpayer to come into compliance.
Managing your tax liability is a central goal of your long-term financial plan. Given the added complexity that comes with income from international sources, it’s important to make sure you report this income accurately while also taking advantage of tax reduction strategies. Your Paracle advisor can help you think through your options and build them into your plan, or refer you to tax and legal experts for additional guidance.
We’d like to thank Mary Hawkins (CPA) for helping us prepare this article.