Common Issues for Expats filing U.S. tax returns
1. Tax obligations for retired U.S. citizens that expect to remain in a foreign country.
Your U.S. tax obligation is the same as that of a retired person living in the United States.
2. I have lived abroad for a number of years and realized only recently that there is a requirement to file U.S. tax returns.
If you have not filed a U.S. income tax return for one or more years you should try to get back on track. The IRS announced new streamlined filing compliance procedures. This program requires 3 years of late tax returns and 6 years of FBARs, along with a certification that failure to file was not due to willful conduct. The program was updated in August 2022.
3. Filing for an extension.
Expats are allowed an automatic 2-month extension to file, however if U.S. tax is due it should be paid by April 15. You can get an automatic 6 month extension of time (from April 15) to file (but not of time to pay) by filing Form 4868. You must file this by the due date for filing your return. Expats should apply by June 15 to receive an extension to October 15.
To obtain an extension in order to meet tests for foreign presence file Form 2350. You must file this by the due date for filing your return.
This form should be mailed to:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0045
4. U.S. Withholding Tax
Sometimes U.S. tax is withheld at a rate of 30% on U.S.-sourced interest and dividends. This situation can be corrected by filing Form W-9 (indicating that you are a U.S. citizen) with the withholding agents who are paying you the interest and dividends. This form is the withholding agent’s authority to stop withholding the tax.
5. Contributions to Foreign Charitable Organizations
Generally, you cannot deduct direct contributions to foreign charitable organizations. You can deduct contributions to U.S. charitable organizations that transfer funds to a foreign charity.
You can deduct contributions to certain Canadian, Israeli, and Mexican charitable organisations, under certain circumstances.
6. Foreign Bank Accounts
If you have a financial interest in any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, and if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report the account each year by filing Form 114 with the Financial Crimes Enforcement Network (FinCEN). This form is due on or before April 15, of the succeeding year. However an automatic extension has been granted to October 15th for US citizens living abroad.
7. Foreign Financial Assets
Form 8938 is required with Form 1040 if you are living outside the U.S. and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year. For joint filers the thresholds are $400,000 and $600,000 respectively. Specified assets include but are not limited to financial accounts, stocks, notes, bonds, debentures, swaps, caps, floors, other options, other derivatives, pension accounts, foreign trusts, foreign estates, and interests in a foreign entity. The failure-to-file penalty by the due date can be up to $10,000. Please also see the FATCA Section.
8. Foreign Mutual Funds
Foreign mutual funds or investment companies typically do not produce the same reports (e.g. 1099 form) that U.S.-based mutual funds do. Therefore, U.S. tax laws are designed to deter U.S. persons from investing in mutual funds outside the U.S. by imposing high tax rates and cumbersome reporting requirements. These foreign funds are referred to as passive foreign investment companies or PFICs. In general, a U.S. person may be better off to invest directly in the stock of foreign corporations that are not PFICs or to invest in a U.S. mutual fund that invests in foreign stocks or foreign mutual funds.
9. Foreign Corporations
An information return (Form 5471) is required to be filed with your annual tax return if you are a shareholder, director or officer in certain foreign corporations. Generally, if you are a U.S. person and you have a shareholding of 10% or more of a foreign corporation, you are required to report the details, even if there is no taxable income to report. Depending on the category of taxpayer you are considered, and there are four to choose from, there are a number of schedules to complete, in addition to the main form (5471). Penalties can be severe for failure to file.
10. Foreign Partnerships
Similar to the point above, an information return (Form 8865) is required when a U.S. person has an interest of 10% or more in a foreign partnership. A 10% interest in a partnership is an interest equal to: 1O% of the capital, 1O% of the profits, or 1O% of the deductions or losses.
11. Currency Transportation
If you physically transport, mail or ship currency or other monetary instruments totalling more than $10,000 into or out of the U.S. you are required to file FinCen Form 105 (Report of International Transportation of Currency or Monetary Instruments). A transfer of money through normal banking procedures is not required to be reported.