Americans are required to file a US tax return every year, regardless of where they live. Millions of expats are unaware of this filing obligation and millions more are confused about what is true and what is not. So we are going to set the record straight and explain the top 5 myths about US expat taxes!
Myth #1: I don’t need to file a US expat tax return once I move abroad.
This is untrue! There are approximately 7 million Americans living abroad and only about half actually file their US taxes each year, so many expats believe this myth is true! The US requires you to report your worldwide income every year. Assuming you earn enough money to be required to file in the US, you will need to file while living abroad. You need to file a US expat tax return if:
- You are self-employed with income over $400 per year (yes, only $400…)
- You are single with income over $10,000 per year
- You are married filing jointly with income over $20,000 per year
- You are head of household with income over $12,850 per year You may also need to file if you have distributions from tax-favored accounts, such as IRAs or other pensions, or health or medical savings accounts.
Myth #2: I can make $100,000 abroad and it’s tax-free!
Well, this one may not be entirely a myth! If you qualify as an expat, you are eligible for the Foreign Earned Income Exclusion, which allows you to exclude up to $97,600 of your income (in 2013) from your US taxes. So technically you can exclude much, if not all, of your earned income from your US tax liability. Earned income includes salary, wages, commissions and royalties, but does not include interest, dividends, retirement benefits, alimony, child support or rental income.
To qualify as an expat, you simply have to pass one of the 2 determining residency tests: the Physical Presence test or the Bona Fide Residence test. To qualify via the Physical Presence test, you need to have foreign-sourced income and be outside of the US for 330 of any 365-day period. (Most expats qualify this way.) To qualify via the Bona Fide Residence test, you must reside outside of the US for at least one year and have no intentions of returning to the US.
Remember that if you are self-employed you will still be responsible for Social Security/Payroll taxes, which is 15.3% for all self-employed individuals.
Myth #3: I am invisible to the tax man: They can’t find me!
Until recently, this wasn’t entirely a myth. But now it is! The US has launched a full-scale effort to uncover tax evaders who hide money in offshore accounts. In 2014, FATCA (Foreign Account Tax Compliance Act) goes into effect and individuals are required to report their offshore assets if they exceed certain thresholds (see below). In additional to individual reporting requirements, the US has signed agreements with dozens of countries whereby foreign financial institutions will be required to report on the accounts of their American clients.
What does this mean? Well, if your assets exceed the threshold yet you fail to report it, your bank likely will. You can’t hide.
The types of assets that must be reported are:
- Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer
- Stock or securities issued by a foreign corporation
- A note, bond or debenture issued by a foreign person
- A partnership interest in a foreign partnership
- An interest in a foreign retirement plan or deferred compensation plan
- An interest in a foreign estate
- Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value
The thresholds for filing FATCA Form 8938 are as follows:
- Filing single and your balance was over $200,000 on the last day of the year or over $300,000 on any day during the year.
- Filing jointly and your balance was over $400,000 on the last day of the year or over $600,000 on any day during the year.
In addition, if you have $10,000 in foreign bank accounts at any point during the year you are required to file the FBAR (Foreign Bank Account Report) Form FinCEN 114. This is yet another IRS tool to ensure taxpayers aren’t hiding their money overseas.
Penalties for failing to file Form 8938 or FinCEN 114 when you are required to do so can be steep (including criminal prosecution!), so if you have any questions about your personal reporting requirements, consult an expat tax professional.
Myth #4: I’m an expat so Obamacare definitely won’t impact me.
It MIGHT.
Obamacare (or the Affordable Care Act) went into effect in 2014 and expats around the world are wondering how they may be impacted. Obamacare requires that every American holds the minimum essential healthcare coverage or pay a penalty tax (which is assessed on your tax return the following year).
Expats who qualify for the Foreign Earned Income Exclusion are exempt from Obamacare provisions. If you don’t qualify, nor do you have a qualifying US expatriate health policy, then you may be forced to pay the Obamacare tax.
Some expats are expected to hold a US insurance policy, but since you are required to reside in a US state in order to purchase a policy, it’s not an option. So unfortunately, you may be caught in this gap- living overseas and unable to obtain US health care coverage, but not overseas long enough to be exempt from Obamacare.
The penalty tax for 2014 is the greater of $95 per person ($47.50 per child) or 1% of your income. If you return to the US, you have 60 days to obtain coverage without penalty.
Myth #5: If I file now, I might get arrested on my next trip to the US.
For most expats, this is a myth.
The IRS is unlikely to punish you if you come forward and voluntarily file your back taxes. Like we said, millions of Americans are in this situation and are behind on their US tax obligations. There are no guarantees that you won’t incur penalties for the delinquent returns, but it’s highly unlikely that you will be arrested. Ty Warner, founder of Beanie Babies stuffed animals was recently ordered to pay over $60 million in back taxes and penalties and he got probation—so don’t let your fear keep you from coming forward and getting caught up!
This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat taxes for Americans living abroad. Greenback offers straightforward pricing, a simple, hassle-free process, and CPAs and IRS Enrolled Agents who have extensive experience in the field of expat tax preparation. If you’d like Greenback to prepare your individual US expat tax return, simply click here to get started.
For more information about Greenback Expat Tax Services or your US expat tax obligations, please contact us or visit www.greenbacktaxservices.com.
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