This is a major misconception which results in serious ramifications and consequences for those thinking they can evade their tax liabilities back home. Even giving up US citizenship in order to evade your US tax liability is illegal! That is the bad news, but there is a lot of good news to make up for this, so read on to understand how the Internal Revenue Service (IRS) can help you before they hurt you.
All US citizens living overseas must file a tax return with the IRS by the normal filing date of April 15th; but for overseas residents there are a series of automatic and discretionary extensions, typically for 2 and 6 months. The general rule is that while you file an extension for late filing of the return, you must pay all taxes due by April 15th or face interest and penalties. Filing a tax return has become greatly simplified with the introduction of e-file (electronic filing) by the IRS – all you need is a computer and an internet connection and this will avoid any complications with international mailing through lost or delayed post.
One important note for expatriates: if you fail to file a US tax return, then the statute of limitations does not apply to that year and you can be prosecuted and assessed for back taxes, interest and penalties no matter how long has elapsed. Your best protection is to file a US tax return.
There are two other forms for overseas residents which they almost always have to file with the US tax return:
• Form TD F 90.22-1 – this form must be filed if you hold overseas any bank account, security or other financial account;
• FinCen Form 105 – this form must be completed if you personally transport, mail or ship USD $10,000 or more out of the US.
The Good News: Tax Exclusions, Deductions and Exemptions
US citizens resident overseas do not have to pay Medicare or US Social Security payments and they are not liable for withholding in respect of these liabilities. In addition there are three exemptions and deductions:
• Foreign Earned Income Exclusion – for 2009, up to $91,400 of earned foreign income is excluded from liability for US taxes;
• Foreign Housing Exclusion – a percentage of overseas housing costs can be excluded from your total income which is liable for US taxation – this only applies to the employed; and
• Foreign Housing Deduction – this is the same as the housing exclusion above but applies to the self-employed. In both cases, the calculation is complicated and the amount varies depending on your income, costs and location.
The rules for determining whether you are a foreign resident are also very complicated and beyond the scope of this article.
Overseas Expenses and US Tax Deductions
Not paying taxes in the US is a double edged sword when it comes to claiming them as a deduction against US taxable income. Any expenses incurred overseas, and for which you pay out of the income for which you claim any of the foreign exemptions or deductions, cannot be offset against your US taxable income or liability.
There are numerous exemptions for which you can claim a deduction in your US tax return irrespective of where they are paid, such as paying child support, spousal support and charitable donations.
It is also important to understand that unearned income, such as interest or investment income, will be subjected to US taxes – the exemptions only apply to earned income.
Double Tax Treaties and Overseas Representation of the IRS
The US maintains tax treaties and arrangements with a number of countries which provide for US citizens to be “excused” from US tax liability if they are paying taxes to the country which is their “tax home”. This may not totally eradicate liability for US taxation, but the rules are complex and you really need expert, professional advice to ensure you do not pay more than you should or fail to account for your liability.
The IRS is highly active overseas and maintains permanent offices in the following countries:
• The United Kingdom;
• France;
• Germany; and
• China (though full service is not yet available)
In addition, there are numerous IRS representatives attached to embassies and consulates around the world. These offices and representatives are available to assist US citizens in determining and settling their liability, however they are also the foreign eyes and ears of the IRS with an active remit to identify the foreign activities of US citizens and whether full declaration is made.
More Expat Resources
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
