(Editor’s note: This was originally posted in January. We’re reposting as we get closer to the April 15 filing deadline.)
For the record, there are only 11 days until your U.S. tax filing is due.
That’s right, American expats. You might live in Germany or Latvia or Turkey, but you still have to file federal income tax returns. Oh, and you might have to file state tax returns as well. (My wife Cheryl and I found out the hard way as Department of Defense employees that we shouldn’t have been paying state taxes. But our accountant at the time didn’t tell us we’d “broken our domicile” when we sold our house in the U.S. No property, no state tax obligation. Don’t forget that!)
American expats are victims of one of the most egregious tax deals in all the world.
As Bloomberg’s editorial board pointed out last April, only two nations out of 195 tax their citizens who live abroad. One of them is Eritrea, a small, hopelessly corrupt East African country that punishes anyone who even tries to leave without official permission. The other is Uncle Sugar.
Paying taxes for services you can’t use and roads you can’t drive on from 4,000 miles away rankles, no doubt. But the IRS essentially collects a toll for owning an American passport. And of course, if your income is sufficiently grand, you’re legally obliged to ALSO pay taxes in your country of residence. If that’s someplace like Denmark, you’re in trouble ….
The truth is, we expats pay U.S. taxes because the IRS wants to stop wealthy Americans from offshoring their money to escape taxes. And the rules change every year. For 2016, we’ll see some of the biggest changes in decades, changes that could possibly lead to your losing your U.S. passport.
• Congress just passed, and President Obama signed, the Fixing America’s Surface Transportation, or FAST, tax. Under the first tax provision of the FAST Act, the U.S. Secretary of State can now deny a passport to, or revoke the passport of, any taxpayer judged by the IRS to be seriously delinquent on their tax debt. “Seriously delinquent” is defined as in excess of $50,000 including interest and penalties. This is not a joke, and you should probably consult a tax lawyer if you think you could get caught up in this, because it’s no secret some longtime American expats stop paying their taxes after a few years.
• In addition to filing U.S. tax returns, most expats have to submit a Report of Foreign Bank and Financial Accounts, or FBAR, to the Treasury Department. Under the Foreign Account Tax Compliance Act, if the cumulative balance in your foreign bank and/or investment accounts is more than $10,000 at any time during the year, you have to submit the FBAR. The penalties for failing to do so can be the greater of $100,000 or half of the account value for every year you failed to file. And get this: the IRS is threatening to revoke passports if expats fail to comply under FACTA.
FinCen form 114 – known as the FBAR form – used to be due on 30 June. Starting this year, that due date is April 15 to coincide with the tax return filing deadline. But, you now have a 6-month extension to file the FBAR form.
• Single expats with more than $200,000 and couples with more than $400,000 in foreign assets on the last day of the year—or with more than a respective $300,000 or $600,000 any time during the year—must also file IRS Form 8938 Statement of Specified Foreign Financial Assets. And this is really important – starting now, foreign financial institutions must disclose the account values of American clients to the IRS. That’s you, Switzerland.
• The Foreign Earned Income Exclusion is the biggie. It increases to $101,300 from $100,800 in 2015. In other words, you don’t have to pay U.S. income tax if your income is less than $101,300 AND if you meet certain qualifications under Section 911 (appropriate, huh?) of the tax code: To qualify for the foreign-earned income exclusion, you must live and work outside the U.S. for 330 days in any 12-month period or prove you have a permanent residence in a foreign country.
• Speaking of a residence, the incredibly generous American tax code also allows expats to deduct “reasonable foreign housing expenses” over the amount they would expect to spend on housing in the United States. For 2016, the amount is $44.19 per day, or $16,208, up from $16,128 in 2015. The foreign housing allowance is capped at 30 percent of the foreign-earned income exclusion amount. Obviously, some places are more expensive than others when it comes to housing. So if you live in Tokyo or Hong Kong, you can deduct far more housing allowance. Check with your accountant.
• For 2016, the maximum amount of net earnings from self-employment subject to Social Security tax increases to $118,500.
Finally, don’t forget that if you’re paid in euros, you have to convert your earnings to dollars. Here’s how, courtesy of the IRS:
You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. Taxpayers generally use the yearly average exchange rate to report foreign-earned income that was received regularly throughout the year. However, if you had foreign transactions on specific days, you may also use the exchange rates for those days. Exchange rates can be found at Foreign Currency and Currency Exchange Rates. Yearly average currency exchange rates for most countries can be found at Yearly Average Currency Exchange Rates.
Note to self: The 2016 tax deadline 18 April, NOT 15 April per usual, because of holidays. Of course, longtime expats know we get an automatic 2-month extension to file.
There is sooo much more to it than this that you’re crazy if you try to do your own taxes. There are dozens of firms specializing in expat taxes simply because they’re such a maze.
Also, check out these informative posts on the intricacies of tax changes:
Six Financial Mistakes People Make When Retiring Abroad, the Wall Street Journal