Expatriate taxation is highly specialized, and the Foreign Account Tax Compliance Act now requires over 110 countries to report financial accounts held by U.S. citizens and Green Card holders to the IRS. The rules change frequently and can be counter-intuitive. Just a simple oversight can cost a taxpayer $10,000, or more. So, it’s important to use a CPA who works with expatriates a lot instead of someone who handles just one or two expats a year.
Experienced in Expatriate Tax Compliance
Since its inception in 1996, E&A’s award-winning team has helped with the U.S. tax compliance obligations of U.S. citizens and resident aliens (Green Card holders) working or living outside of the U.S., as well as citizens of other countries living within the U.S. E&A has worked with personal and business clients in/from 80+ countries on 6 continents. Because of other countries’ myriad laws, treaties, and specific licensing requirements, E&A only handles U.S. tax issues. However, our colleagues around the world address non-U.S. tax matters.
Our services include foreign asset reporting in addition to Federal and state income tax compliance and preparation. We also provide tax planning services for those considering relocation abroad, etc.
Not knowing what you don’t know can (and likely will) hurt you.
Compliance Obligations for Expatriates
Income tax filings
These issues are tricky, can be complex, and can have huge ramifications. Incorrectly handling overseas retirement accounts; residency status; the number of days outside the U.S.; foreign tax credits against U.S. tax; and a $112,000 Foreign Earned Income Exclusion (for 2002) can easily cost a taxpayer tens of thousands of dollars.
Foreign Bank Account Reporting (FBAR)
Bank and/or investment accounts (incl. many retirement accounts) over which a person has signatory control must be reported, even without ownership, if they total over $10,000 at any time in the year. For example, the parents of a son/daughter living overseas who have signature authority over his/her account in that location must report the account. Penalties are draconian and can include criminal sanctions in addition to monetary penalties of up to 100% of the account balance. However, ways to minimize the impact of prior non-compliance exist if you “catch up” voluntarily.
Foreign Financial Asset Reporting
Additional, separate reporting is required if the total balance of foreign bank and investment accounts (including many retirement accounts) a person owns, even without signatory control, exceed certain levels. Those levels vary based on marital status and residency, and can be as low as $75,000. The same draconian penalties can apply.
Foreign Business Ownership Reporting
U.S. citizens and Green Card holders must also report greater than 10% ownership in non-U.S. businesses and trusts. Non-compliance can trigger penalties up to $100,000 per failure. Certain large transactions with non-U.S. parties also must be disclosed. Similar reporting is required for trusts and large foreign transactions.
We’ll be pleased to help you navigate the complex rules, avoid taking undue risk, and minimize your tax due. Unless a person works with these issues all the time, it’s very easy to miss something that could have a huge adverse impact on you.
What You Need to Know about Expatriate Taxation
Tax systems vary widely among countries, and few general rules exist, especially for expatriates. Major differences exist in how tax is determined and collected; sanctions for violations; and more. Tax treaties may also apply. For example, the U.S. has treaties with about 70 nations.
Most countries use either territorial, residence-based, or exclusionary systems to limit the scope of their tax system on expatriates. They also often provide offsets for overseas income to prevent income being taxed twice. Generally, countries taxing worldwide income also grant credits for taxes paid to other countries. However, some use hybrid systems and some tax local income only, while others tax worldwide income.
In territorial systems, only income originating inside that country is taxed. In residence-based systems, residents of a particular country are taxed on worldwide income, while non-residents are taxed on local income only. Only the United States and Eritrea tax non-resident citizens on worldwide income.
Most tax systems are residency-based with specific rules for defining a “resident”. While definitions vary, they usually involve the location of a person’s main home and the number of days a person is physically present in the country.
These systems usually tax only local income regardless of the taxpayer’s residence. A key problem with territorial systems is the ability to avoid tax on income by moving it outside of the country, which leads some countries to enact hybrid systems.
The U.S. uses a hybrid system that taxes all foreign and U.S. income worldwide at the same rates. To eliminate double-taxation, U.S. citizens may exclude some foreign income from U.S. taxation and take a credit for income tax paid to other countries on foreign income if they meet certain tests. But, they must timely file a U.S. tax return claiming the exclusion and/or credit—even if they have no tax liability.
U.S. enforcement tactics also include denial of passports to delinquent taxpayers and seizure of local accounts and/or assets. That’s why it’s important to seek a professional’s help on reporting your accounts—and quickly!
Download the spreadsheet below which contains with tables (compiled from outside sources) summarize how local and foreign income is taxed in other countries, certain dependent territories, and certain countries with limited international recognition. E&A has served clients in/from those countries listed in bold italics.