US Citizens Abroad
In today’s globalized world opportunities are boundless. Most Americans seek jobs and investments in other countries to realize their dreams. Working or investing in foreign countries can be really rewarding, and also legally confusing.
Americans who work and live abroad still have tax filing obligations as well as some relieves provided by the Internal Revenue Code. We’ll briefly describe some of these advantages and responsibilities below. Detailed information is to come in future posts.
Foreign Earned Income Exclusion
Federal tax laws allow tax payers who live and work abroad to exclude a portion of their earned income from taxable income. The amount excludible is adjusted for inflation every year; in 2018 the Foreign Earned Income Exclusion (FEIE) is $104,100. This exclusion is only applicable to earned income (i.e. salary or self-employment), passive income categories such as interest, dividend or rental income cannot be excluded. Another condition is to live outside the US. Employees who work for foreign organizations but perform duties while residing in the US are not eligible for the FEIE. FEIE is reported on Form 2555 or 2555EZ
Foreign Housing Exclusion/Deduction:
Foreign Housing Exclusion (FHE) goes hand in hand with FEIE. FHE can only be taken on amounts deemed to be paid by employer provided amounts (Salary or bonuses). If, for example, a taxpayer earns rental income in a foreign country and pays his or her housing expenses with that money abroad, they’re not eligible to take the exclusion. The housing exclusion is total housing expenses minus a base housing amount. Base amount is 16% of the Foreign Earned Income Exclusion allowed for the tax year. There is also an upper limit which is generally the 30% of FEIE but may vary from country to country. Needless to say lavish or extravagant housing spending is not excludible, neither are domestic worker salaries. Foreign Housing Deduction applies to self-employed individuals and housing expenses paid by amounts from self-employment income. Both are calculated and taken on form 2555 or 2555EZ
Foreign Tax Credit
The US government has signed Tax Treaties with many countries. Those treaties are aimed at eliminating double taxation. This is accomplished in the US by taking the Foreign Tax Credit (FTC) on Form 1116. FTC is allowed on federal returns regardless of the residency. Tax payers are eligible to take this credit even if they reside and/or work in the US. The FTC is not available on the state level.
Totalization of Social Security Payments
Like the income tax treaties, the US has Totalization Agreements with several countries (far fewer than Income Tax Treaty countries). These are: Italy, Germany, Switzerland, Belgium, Norway, Canada, United Kingdom, Sweden, Spain, France, Portugal, Netherlands, Austria, Finland, Ireland, Luxembourg, Greece, South Korea, Chiel, Australia, Japan, Denmark, Czech Republic, Poland, Slovak Republic, Hungary, Brazil and Uruguay. Slovenia and Iceland have been added in 2019. These agreements aim at coordinating the US social security program with that of other countries that have similar systems. By utilizing those agreements, workers from one party don’t have pay social security taxes twice on the same income.
Americans with Assets Overseas (Off Shore Accounts)
International Taxation concepts apply to those Americans who owns financial or physical assets in foreign countries. Those assets can be—without limitation– bank accounts, stocks, bonds, brokerage house accounts, foreign corporation ownership, interest in partnerships or rental properties. All of these assets are the subject of US tax laws.
Report of Foreign Bank and Financial Accounts (FBAR)
Taxpayers who keep bank accounts in foreign financial institutions are required to file Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114 if the aggregate value of those foreign accounts exceed 10,000 USD at any time during a calendar year. Accounts owned separately or jointly as well as accounts where the taxpayer has signatory authority but no financial interest must be filed. Taxpayers filing status does not affect this filing requirement, neither does not filing an income tax return. Failure to file FBAR reports might result in $10,000 initial penalty per year and increased amounts for repeat non-reporting.
Foreign Account Tax Compliance Act (FATCA)
FATCA generally requires foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The US government was able to get majority of foreign countries on board with FATCA requirements and now all of those countries are reporting on values of financial assets held by US persons (citizens, GC holders, corporations, partnerships etc.). FATCA also requires US taxpayers to report information about their foreign financial assets every year or face a steep penalty. This information is reported on Form 8938, Statement of Specified Foreign Financial Assets. This report is triggered by filing status and aggregate value of specified foreign financial assets. Filing FinCEN 114 doesn’t relieve taxpayers of the FATCA filing requirements, the two are independent and go to different places in the Treasury Department. However, Form 8938 is dependent on Income Tax Filing requirements. If a person is not required to file tax return for a year, they don’t need to file form 8938 either.
Information Return of US Persons With Respect to Foreign Corporations
Certain taxpayers who hold stock or serve as director or manager or foreign corporations or controlled foreign corporations must file Form 5471. US citizens and US residents who are officers, directors or shareholders in certain foreign corporations are responsible for filing an information return on the said corporations. This form is akin to a US corporate tax return with more information and schedules required based on filing category. One major difference is that the US government cannot directly tax those corporations since they were formed under the laws of a foreign government. Failure to file form 5471 carries severe monetary penalties. Read more about Information Return of US Persons With Respect to Foreign Corporations.
NON-US CITIZENS
The US tax law requires all individuals and organizations to pay taxes for income earned in the US regardless of their citizenship status. This have a dramatic effect on non-us citizen individuals who have to live in the US for a limited time and also earn income while here.
The law groups non-us citizens in two different categories: resident aliens and non-resident aliens. Resident aliens are treated just like the US citizens and permanent residents, i.e. they’re taxed on worldwide income and they have to file information returns about offshore bank and securities accounts. They can also take advantage of foreign tax credit, if applicable.
Non-resident aliens, on the other hand, are mostly taxed on US income only. They don’t have to report foreign income during the period they remain a non-resident alien. These individuals are not eligible for some of the deductions and credits that are allowed for US persons. Taking advantage of such tax tools may result in severe penalties.
A taxpayer must use either of Green Card test or substantial presence test to determine his or her residency status. One must keep in mind that the IRS determination of residency might differ from that of the Department of Homeland Security’s and doesn’t grant a person any immigration status. It is possible for a taxpayer to have dual status (non-resident during a portion of the year, and resident thereafter) for a particular year.
All these complexities make it very difficult to comply with laws and regulations for non-us citizen persons. Global Tax Consulting experts are trained and credentialed in tax matters involving foreign nationals and offshore accounts. Let us review your situation and offer you the best route while saving you time and money.
FOREIGN CORPORATIONS
The United States is a lucrative market for businesses around the world. She is also a business friendly country with very effective regulations that make conducting any trade as easy as it can be. However, same regulations also make sure all foreign corporations that do business in the United States pay their fair share of taxes.
Unless a foreign corporation can take advantage of certain exceptions or is required to file a special return all foreign companies that conduct business in the US have to file a foreign corporation income tax return every year if the corporation:
- Was engaged in a business in the US regardless of whether the company actually earned any income. The requirement is still in effect even if the income earned is exempt from US tax under a income tax treaty.
- Had financial activity (gain, loss or income) treated as effectively connected to a trade or business in the US.
- Did not conduct business in the US, but earned income from a source in the US and the amount withheld from earnings wasn’t enough to cover the total tax liability.
A correctly prepared return is also required if the foreign corporation is asking for a refund of overpaid taxes, claiming the benefit of any deductions or credits, and making a claim that an income treaty overruled or modified any provision of the Internal Revenue Code with respect to income derived by the foreign corporation at any time during the tax year, and such position is required to be disclosed on Form 8833.
