US income tax laws can be very difficult to understand and they often change year to year. US expatriate tax laws tend to be even more complicated and many US expatriates find the laws difficult to understand, never mind their CPA’s and tax attorneys! Our professionals at Protax Consulting Services Inc (“Protax”) have compiled a list of a few helpful facts that will assist you in further understanding US expatriate tax laws!
If your earnings exceed a certain threshold, you must file a tax return.
As a US expatriate, you are supposed to file a US tax return every year if your collective income exceeds certain filing thresholds. The income that attracts taxes includes earned income, such as wages, self employment income and investment income like rental income, dividends, and interest earned from both US sources and non-US sources. It’s a good idea to find out what the filing threshold is for your filing status.
Expats have until June 15th to file their tax return
The filing deadline for US expatriates that are outside of the US on April 15th is two months after on June 15th. This is automatic, since no filing is required to obtain the June 15th extension.
Previous returns can be amended
If you made a mistake on your previous return, you can file an amended tax return using form 1040X. If you erroneously failed to report some income, it is best to file an amendment before IRS finds out to avoid serious penalties, since we have a voluntary tax compliance system meaning that as long as taxpayers notify the IRS of the error before the IRS finds out the IRS will generally not impose failure to report or accuracy penalties. If you didn’t take all the deductions allowed, you can still file an amendment within the statutory limitation period, which is generally three tax years.
In cases where the taxpayer is delinquent and/or has failed to include all of their income in filed past US income tax returns, if the concept of non-willful conduct is met taxpayers must use the Streamlined program using either the Domestic or Foreign Offshore Procedures. The significant part of this program is the requirement to file only the last three years of US income tax returns and six years of FBARs on Form 114, in a 100% totally penalty free environment. That is no late payment and no late filing penalty, no accuracy or information penalties, you pay just the tax (if any) and interest. There is a title 26 Misc 5% penalty on the maximum value of FBARs in the 6 year period in the Streamlined Domestic Offshore Program only. What this means is that basically ‘almost’ any individual who has not filed US income tax returns or FBARs for past years can clean up their act penalty free, no questions asked and pay only the tax owed with interest only, on only up to the last three years. Protax has completed and are in process of completing many such streamlined filings. Click here to read a more comprehensive breakdown on the streamlined process.
Take advantage of important exclusions and deductions
Many US expatriates pay more taxes than necessary by using the wrong/unlicensed tax professional or due to the lack of knowledge regarding certain exclusions and deductions. Find out about foreign tax credit, foreign housing exclusion, and foreign earned income exclusion. Find out if you qualify for any of them to avoid paying more income tax than you should pay on your worldwide income. Remember, IRS officers are trained to detect all forms of tax evasion, but not tax overages.
There are many factors to take into account when filing taxes as a US expatriate, but these tips should help you get started come tax season. For more comprehensive knowledge about US expat tax law, please visit us at Protax Consulting Services Inc.