Tax Info for Americans Living Abroad

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  • #49758
    CharlieCharlie
    Keymaster

    I recently discovered a fantastic tax service for Americans living abroad who ended up becoming a generous sponsor for Chengdu Living. If any of you are looking for someone to help you navigate American taxes from abroad, this is your guy. The below is written by Olivier Wagner of 1040abroad.com:

    Charlie invited me to write a blog post on US taxation. Since many of you probably have such questions, I decided to do a fake Q&A, with what I think are the most common questions that US citizens living in China face.

    1) Do I have to file a US tax return?

    Yes, the same filing requirements apply to US citizens wherever they live. Hence, if your annual income is more than 10,400 US dollars (adjusted on inflation, equal to the sum of the standard deduction and the personal exemption), you would have to file a tax return.

    2) Will I actually have to pay income tax?

    In most cases, no. US citizens abroad usually reduce their income tax owing to zero by using either the Foreign Tax Credit or the Foreign Earned Income Exclusion (FEIE).

    3) What is the Foreign Tax Credit (FTC)?

    In simple terms, the taxpayer would get a credit of one to one for the taxes paid to a foreign country. While this is a non-refundable tax credit, it allows US citizens who pay more tax to their host country (than their US tax liability would otherwise be) to reduce their US tax liability to zero. Another caveat is that it can not be used to offset US income, hence US income would still result in a US liability.

    4) What is the Foreign Earned Income Exclusion (FEIE)?

    The FEIE is more restrictive than the FTC, but will be very useful to those taxpayers who do not pay tax to a foreign country (or pay it at a rate too low to be useful).

    It is restrictive in that:

    • It can only be applied against earned income (wages and similar)
    • One needs to meet one of two test in order to qualify:
    • Either the physical presence test: That’s the famed 330 days rule: Spend at least 330 days in any 12 month period in a foreign country and you can exclude your foreign earned income. Everybody loves it because it is black and white: count your days and you qualify.
    • Or the Bona Fide Residence test: That is, you truly are a resident of a foreign country. At a minimum, you need to be liable to pay income tax to that country and not have claimed to be a non-resident to the authorities of that country. Then, there’s a lot of other factors: whether you learn/speak the language, whether you vote there, have a mailing address, have bank accounts, what your immigration status is (the closer to permanent, the better)… It is more subjective, but a viable solution for anybody who has strong ties with a foreign country (and spends enough time there, again no clear cut answer, but I wouldn’t claim it for somebody who spends less than 6 months out of the year in that country).

    For 2015, one can exclude up to 100,800 US dollars of earned income using the FEIE.

    3) What about self-employment tax?

    US citizens abroad don’t have to pay Social Security tax if they are paying social security tax to a country with a totalization agreement with the US (hint: not China) or if they are working for a foreign employer.

    That leaves self-employed people, and unfortunately the answer is that they are liable to pay self-employment tax, at a rate of 15.3% even if all of their work was performed outside the US (and even if they reduced their tax owing to zero using either the FTC or the FEIE).

    4) Any other filing obligation?

    Yes, lots 😉

    The obvious one is FBAR: That is reporting foreign bank accounts if you have a balance of more than 10,000 US dollars (the amount was set in the 1970s, never indexed to inflation). It is done using form Fincen 114.

    Taxpayers owning more than 50% (or in some cases 10%) of a foreign corporation would have to file form 5471 (which is essentially a corporate tax return).

    Noncompliant US citizen:

    Here is another question: I have a Chinese corporation, I am a US citizen. I’m also consider surrendering US citizenship. What can I do?

    Penalties:

    • In theory, the IRS/Fincen could take away everything you own if there was willful behavior. Penalty for willful failure to file an FBAR: 50% of account balance per year (they can go back up to 6 years, but the IRS came out saying that they would only at most take everything, not 300%, really generous on their part). Penalty for non-willful failure to file an FBAR: $10,000 per account per year. Penalty when the failure to file the FBAR was due to reasonable cause: nothing.

    In practice, I have not seen penalties assessed for people who came forward, and penalties are even less likely if they use the Streamlined Offshore Procedures.

    • Form 5471: Since you own a non-US corporation, you would have to file form 5471. The penalty for failure to file it is $10,000 per year. In practice, I have not seen penalties assessed for people who came forward, and penalties are even less likely if they use the Streamlined Offshore Procedures (but this penalty is assessed automatically without human intervention in a corporate context, when a US corporation owns a non-US corporation and files a form 5471 late).

    Income tax:

    My clients almost never pay tax (or if they do, it is a nominal amount) by taking the foreign tax credit. It is a one to one credit (you get a dollar of credit for every dollar of foreign tax paid). If the tax rate was greater in the foreign country than in the US, it would reduce the tax to zero (the excess can be carried over to future years). Referring to clients in Canada, Europe, Australia, New Zealand, their tax rate was high enough to reduce the US tax owing to zero or to a nominal amount.

    Other than that, you could also use the Foreign Earned Income exclusion but that only applies to earned income (wages and similar).

    The bottom line is that while we would have to run the numbers, the income tax liability will likely not be as bad as you think.

    Subpart F income:

    The undistributed income of your company is most likely subpart F income (meaning that it will be taxed to him personally). But you will also be able to claim a foreign tax credit for the South African tax paid by the corporation, so here again, you might be ok.

    Social security:

    There is no Social Security totalization agreement between the US and China. As such, if you have self-employment income, you would have to pay Social Security tax at a rate of 15.3%

    What if I surrender US citizenship without becoming tax compliant?

    Well, I wrote a nice post about that with a Star Wars flavor, so here you go.

    What should he do?

    I would recommend using the Streamlined Foreign Offshore procedures to get into compliance without penalty. We would draft a certification statement to show reasonable cause. The procedures call for 3 years of income tax returns and 6 years of FBAR but one can chose to file additional years. In order to avoid becoming a covered expatriate (again, refer to Phil’s blog) when surrendering US citizenship, one needs to be compliant for the past 5 years, so if you would like to surrender US citizenship, we would file 5 years (at this time of the year, it would mean 4 years under Streamlined and a timely filed 2015 return).

    Finally, the 3 years of income tax returns are delinquent returns, so if using this procedure before June 15, it would be 2012-2014.

    Noncompliant green card holder:

    Here is another question: I have a green card but then moved to China, is there anything I should know about US taxes?

    With green card holders comes the notion of “long term resident”. A long term resident is someone who has held a green card in at least 8 out of the 15 prior tax years.

    If someone who is not a long term resident properly surrenders a green card, that person will no longer be a US person (taxpayer taxed on worldwide income), end of the story.

    If a long term resident surrenders a green card, he/she will be subject to the same rules as a US citizen surrendering US citizenship.

    Here again, he/she would need to meet the following 3 conditions to avoid being a covered expatriate:

    • Had an average income tax liability of less than $150,000 per year over the prior 5 years (I have never seen that, and if that was not the case, in all likelihood the following condition wouldn’t be met either).
    • Have a net worth of less than $2 million
    • Certify that he/she was tax compliant for the prior 5 years.

    Properly surrendering a green card:

    Practically speaking, there are 2 ways to surrender a green card:

    1. File a form I-407 with the immigration authorities (either a US consulate of Homeland Security)
    2. Or take a treaty position if they become a resident of a country with a tax treaty with the US that they were a resident of the other country. This is done by attaching form 8833 to their tax return. The nice thing about the treaty position is that it can be done retroactively. So, our client left the US some time last year, we could take a treaty position dated back to that date, and he/she would not be deemed to have a green card in 2016.

    The way to not surrender a green card is by doing nothing. A green card essentially loses its immigration benefits if someone spends too much time outside the US (one year without obtaining a reentry permit). People assume that surely they must also stop being taxpayers. This is not the case, someone who had a green card and leaves without properly surrendering a green card remains a US taxpayer, and could become a long term resident…

    Exit tax:

    When a long term resident surrenders their green card, they would file form 8854, the same as US citizens surrendering their citizenship. If they are a covered expatriate, they would be subject to an exit tax.

    The exit tax is based on the deemed disposition of all their assets at their fair market value. That said, the first 680,000 of such capital gain would be exempt (under Section 877A(a)(3)(A))

    Penalties:

    If he/she doesn’t surrender his/her green card properly: He/she would remain a taxpayer and all the penalties related to unfiled forms could apply.

    Penalties for failing to file form 8854 if the taxpayer was a long-term resident: That would make him/her a covered expatriate. There is also a $10,000 penalty for failure to file form 8854.

    Olivier Wagner is a tax preparer who is both an Enrolled Agent and a CPA (New Hampshire) very well aware of the tax situation of US citizens living abroad. He runs the tax practice 1040 Abroad.

    #49786
    CherryDiabloCherryDiablo
    Participant

    Great to know!

    #50121
    WoodWERDWoodWERD
    Participant

    About 2 days left to file or get your extension in!

    #50150
    baoluo
    Participant

    About 2 days left to file or get your extension in!

    Actually all American citizens or green card holders living abroad can get an automatic 2 month extension applied retroactively when you file. A lot of tax software (TurboTax/etc) will be smart and take care of this for you if you file after the due date, which was about 8 minutes ago as of this post.

    Info here: https://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad—Automatic-2-Month-Extension-of-Time-to-File

    One thing to note is if you do owe taxes, while you won’t be hit with a straight penalty during this 2 month period, interest will accrue on what you do owe. This is a lot less than the normal penalty, but it’s still something.

    If you owe nothing/get a refund, there’s no real penalty at all for taking the extra time.

    #50182
    897934-884
    Participant

    And Hillary Clinton wins New York. And all these tax dollars go to ensuring a “democracy”. In fact, the elite class makes sure things go their way. Funnybusiness at elections always occurs when the globalist candidate is threatened. Happened with Ron Paul, now happens with Bernie Sanders. I can’t stand New Yorkers. 10 dollars for a pint of beer? and you like it that way? Go fuck yourselves.

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