Ah, that wonderful time of the year is upon us—tax season! While you might be dreading the process of filing your US tax return, we are here to give you some tips to make it a bit less ‘taxing’! Here’s a look at the top 5 things you need to know before you file your 2014 tax return.
- US expats get an automatic extension.
While the official US tax deadline is April 15th, expats get an automatic 2-month extension to June 15th. However, if you will owe US taxes (which the majority of expats do not), these taxes need to be paid by April 15th or penalties/interest will begin to accrue. So while you have extra time to prepare your US taxes, getting a jump on it and filing early will alert you to any taxes owed and help you avoid unnecessary penalties.
If you don’t think you’ll be able to complete your taxes by June 15th, you can file for an extension until October 15th. Just make sure to file for that before June 15th! Another reason to file for an extension is if you need extra time to qualify for the Foreign Earned Income Exclusion via the Physical Presence test. This residency test requires that you are physically present inside a foreign country for 330 of any 365-day period. If you moved overseas mid-year and will qualify by the extension date, it’s definitely worth your while to do so. You could offset most or all of your US tax liability with that one exclusion.
- The Foreign Earned Income Exclusion can be a huge tax-saver.
As mentioned above, the Foreign Earned Income Exclusion (FEIE) can help offset or even eliminate your US tax liability (depending on your foreign income). In 2014, the FEIE was $99,200—meaning you can reduce your taxable income by $99,200. (This jumps to $100,800 for the 2015 tax year!)
Remember, however, that the FEIE can only be used on foreign-sourced income. Foreign earned income is income you receive for services you perform in a foreign country during a period your tax home is in a foreign country. Types of income that qualify are:
Income that would not qualify includes:
- Capital gains
- Social Security
If you choose to use the FEIE, it’s important to note that it is not automatic. You need to elect it by filing Form 2555 (or 2555-EZ if you aren’t planning to use the Foreign Housing Exclusion).
- You may need to file FBAR.
FBAR, Foreign Bank Account Report, must be filed if your foreign bank account(s) reach a balance of $10,000 or more during the tax year. This is an aggregate amount, so if you have more than one account, you would total the balances of all accounts—if the amount totaled meets or exceeds $10,000, you must report all the accounts.
Penalties for failing to file FBAR if required can be steep, thanks to a renewed effort by the US to pursue US taxpayers who may be hiding money abroad.
FBAR must be filed by June 30th each year—and no extensions are available. It is not filed along with your US tax return. You submit your FBAR electronically to the US Treasury Department via Form FinCEN 114. (For details on how to file FinCEN 114, see this article.)
- FATCA may not impact you at all.
There has been much discussion in the media about FATCA and its global impact. In short, FATCA (Foreign Account Tax Compliance Act) is designed to uncover tax cheats hiding money in offshore accounts. Expats are an unintended ‘victim’ of this legislation, as you simply must have money in an offshore account because you live there! While there are reports of Americans having difficulties banking because foreign banks are choosing not to work with American clients, these reports aren’t widespread. So despite its bad reputation, FATCA may not impact you at all!
So who needs to file FATCA Form 8938? Those living abroad must file FATCA if their specified foreign assets exceed the following thresholds:
- Single filers: Value of accounts on the last day of the tax year exceed $200,000, or $300,000 at any point during the year
- Married filing jointly: Value of accounts on the last day of the tax year exceed $400,000, or $600,000 at any point during the year
Note that the thresholds are lower for those living in the US.
What are specified foreign assets, you ask? Here is the IRS’ list:
- Stock or securities issued by a foreign corporation;
- A note, bond or debenture issued by a foreign person;
- An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty;
- An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer;
- 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.
Form 8938 is filed along with your US tax return, so if you file for an extension, this extension extends to your FATCA filing. If you are confused about the differences between FBAR and FATCA, you aren’t alone. This infographic should help explain it a bit better!
- There’s no need to panic if you are behind on your US tax filings.
Many expats never knew they needed to file a US tax return while living abroad and the IRS actually understands this. So if you are behind on your US taxes, you have a great option to get caught up, thanks to the IRS amnesty program, the Streamlined Filing Procedures.
Under the Streamlined Procedures, expats simply need to file their last 3 years’ tax returns and last 6 years’ of FBARs (if required). Right now, the IRS has waived all late filing and FBAR penalties so you truly can become compliant without serious financial implications.
This program has no end date so it could terminate at any time. We recommend that you get caught up sooner rather than later—you don’t want the IRS to contact you about your taxes. Once that happens, you are ineligible for the Streamlined Procedures and things could get a lot more expensive!
Arming yourself with information is the key to a successful (and less stressful) tax season!
This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat tax returns for Americans living abroad. Greenback offers straightforward pricing, a 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 US expat tax return, simply click here to get started or visit www.greenbacktaxservices.com for more information.