Expat taxpayers challenges in the US

31 March 2015 |

Tax Challenges Every U.S. Expat Faces : Paying taxes is something that every US citizen is expected to do, and just like everyone else, taxes have to be paid on time. What many people from the US have discovered is that it is not so simple when you are living abroad.

professionals

Getting Records Can Be Difficult: Collecting information for your taxes is pretty straightforward in more developed countries. A common difficulty encountered is trying to figure out expenses in American dollars because of different currency exchange values.

An additional issue that makes tax time especially difficult for expatriates is when you are living in or traveling through a third-world country where receipts may not be given at all. This is common practice in some nations. When you are able to get one, you may find that you cannot even read it later on, making tax time reporting a real headache because of the language.

Be Sure to Report All Foreign Income: All U.S. taxpayers need to be careful and avoid trying to hide money in overseas accounts. According to the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions are now required by the IRS to report assets held by them of American citizens. This is the first tax year (2014) that this is being required, and expats are to report this income information accurately on Form 8938. The form needs to be sent in with the 1040 or 1040NR.

Expats Are Given an Automatic Two-Month Extension on Taxes: U.S. citizens are responsible, according to the IRS, to pay taxes on any income, estate, and gifts that came in during the year, regardless of the place of residence. A two-month extension is automatically being granted to expats this year, giving them until June 15th to file. This includes those who are serving overseas in the military. If you apply for an extension, the date can be extended until October 15th.

In spite of the extension, it does not apply if taxes are owed. Tax payments are still expected to be paid by April 15th, and penalties will be issued on unpaid back taxes from April 15th. In order to help you get your forms filled out correctly, the IRS wants you to be sure to use U.S. dollar amounts, even if you were paid in foreign money. You can use figures from the IRS’s chart on Yearly Average Currency Exchange Rates, or, if you were paid on certain days, you are also allowed to use the rates that applied on that day. If you owe taxes, they expect you to pay them in U.S. dollars.

Foreign Governments Being Encouraged to Cooperate: Foreign governments are being strongly encouraged to perform reporting on money given to U.S. citizens through the creation of intergovernmental agreements (IGA’s). One motivation that the Treasury Department uses to help foreign companies want to report income given to U.S. citizens is that U.S. financial institutions (USFI’s) must withhold some of that company’s money. This is true if the USFI is not able to document that the foreign company is reporting this information to the IRS. The USFI must withhold 30 percent of payments made to those companies.

Tax Reporting by Companies Made Easy and Safe: Reporting by foreign financial institutions and companies is being made simpler through a special secure website that can be accessed through any major browser. It is called the International Data Exchange Service (IDES) Gateway and it encrypts all information transmitted through it to the IRS. The primary difficulty foreseen in this arrangement so far is that only three countries have provided guidelines for their FFI’s in the reporting process. Even then, the guidance may only exist in a foreign language.

Expats have Two Tax Advantages: Two tax advantages of being an expat include an exemption and a credit. An exemption is made for 2014 taxes that allow the expat to make up to $99,200 from working, but they must also be in the country for at least 330 days. The IRS also gives a tax credit on a dollar-for-dollar basis on any taxes paid to their host country.

There is no doubt that expats need to be careful about reporting all income they make from working overseas. The IRS is clearly extending its reach into foreign governments and you can expect that your income is being watched. While FATCA seems to still be in the early stages of development, tax reporting will continue to be a challenge from a large number of countries.