On March 15th AARO held its annual “Tax 101” seminar, led by Tim Ramier, who invited three other tax experts to contribute to the discussion: Nora Muller, Pierre-Thomas Taponier, and Clint Bateman. The seminar addressed mainly U.S. persons filing from abroad for the first time.
U.S. reporting requirements for Americans overseas can be divided into two main categories: income reporting and information reporting. In recent years, the IRS has come up with several procedures to try to get individuals to start reporting.
Who must file?
All U.S. citizens and resident aliens (U.S. persons) must report their income unless they make less than the minimum filing requirement. In 2016, this amount is $10,300 for a single person under 65. If you are self-employed, the minimum filing requirement is $400.
Individuals must declare worldwide gross income: salary, wages, tips, interest, dividends, services, goods sales, rent, etc. All income must be declared in U.S. dollars. The IRS provides currency exchange tools on their website (https://www.irs.gov).
The U.S. is unique in requiring its citizens to report their worldwide income based on their citizenship and not their residency. It is unlikely this will change anytime soon, although there is talk of tax reforms happening after November’s election.
When to file?
The IRS filing deadline of April 15th (in 2016 it will be April 18th, because of a holiday Friday) is automatically extended by two months to June 15th for individuals residing outside the U.S. You can file for an additional 4-month extension (to October 15th) on the condition of requesting this extension by June 15th. An additional extension – until December 15th – is also possible for U.S. persons residing overseas. It is important to note, however, that if you do have tax to pay, it must be paid by April 15th, otherwise you will be subject to late penalties. Clint Bateman recommends that everyone extend to October 15th, as it gives you more time, and may decrease your chances of being audited.
Where to file?
If you choose to file on paper and reside outside the U.S. and owe no tax, your returns should be sent to:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
If you owe tax, your payments should be sent to:
Internal Revenue Service
P.O. Box 1300
Charlotte, NC 28201-1300
What you need to file
To file your U.S. returns, you’ll need your Social Security Number (SSN); salary slips; banking income information; and your host country tax reporting and assessment papers. If you are filing with foreign family, you can apply for an individual taxpayer identification number (ITIN), or SSNs for spouses, children and other dependents in order to claim exemptions for each.
If you expect to owe more than $1,000 in tax, the estimated tax is due on your 2016 income based on 2015 taxes. You can pay upfront or quarterly. Failure to pay estimated taxes can subject you to penalties and interest.
Foreign earned income exclusion
If you reside abroad, you can exclude up to $100,800 of your 2015 earned income. This amount is adjusted annually for inflation. You qualify for this exclusion if you are a Bona Fide resident abroad (living abroad for the entire year) or if you pass a physical presence test, meaning you have lived abroad for 330 days in a consecutive 12-month period.
Tax credits and deductions
Form 1116 enables you to take credit for foreign taxes. You can also claim a standard deduction based on your filing status, or choose to item deductions: medical expenses, charitable gifts, fees, investment expenses, etc. Certain items, such as CSG/CRDS assessed in France are not eligible for tax credits.
Tax treaty benefits
Tax treaties between the U.S. and other countries help individuals avoid double taxation. Tax treaty benefits generally apply to investment income, pensions and annuities, and tax credits.
Information reporting: FBARS, FATCA, PFICs and Gifts
If you have non-U.S. bank accounts with an aggregate amount of $10,000 or more, you must report ALL accounts via the FinCEN Form 114 (also known as the FBAR). This applies to all U.S. persons. It must be filed by June 30th of each year, and there are no possible extensions. The date will change in 2017 to be in sync with the other reporting deadlines, i.e. April 15th and extensions.
How to file? Only electronic filing is possible, via FinCEN’s website (http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html). It is not possible to file on paper; the FBAR is separate from your tax returns. Tax software can file FinCEN Form 114 for you.
Penalties for not filing are heavy: $10,000 for forgetting to file, and $100,000 or 50% of the highest amount in an account in a year for willfully not filing.
FATCA Form 8938
This form, filed with your tax returns, is for declaring financial assets exceeding $200,000 in the aggregate (or $400,000 if filing jointly). This amount used to be much lower before the national taxpayer advocate succeeded in having it raised to $200,000 on the recommendation of AARO. AARO is still advocating for further improvements to lessen the burden of reporting.
Investments – PFICs (Passive Foreign Investment Companies)
PFICs are investments that receive dividends or interests, comparable to a mutual fund. These are taxed on a mark-to-market basis. They must be declared on Form 8621, which is extremely complicated (the IRS estimates that it takes an average of 15 hours and 4 minutes to fill out correctly). This is important to keep in mind when considering whether or not to invest in PFICs.
Form 5471 must be filed by anyone who has 10% or more shares in a company. This form is for information purposes only, and you will not be taxed on the information declared here.
Form 3520 is used for reporting gifts or legacies, if the giver is a non-U.S. person. This form is also for information purposes only.
Form 8865 is used to declare interest in a partnership.
Foreign offshore streamlined compliance
This is a relatively new procedure (beginning in 2014) for those living abroad to become compliant. It is a good tool for those who have not been willfully non-compliant and have recently become aware of U.S. filing requirements.
The procedure allows you to file three back income tax returns and 6 years of FBARs. This is a clean slate measure enabling those who have not previously filed to “come out of the cold”. If you use the streamlined compliance procedure, you must complete a form of certification of why you have not filed in the past. This helps the IRS understand that the non-compliance was not willful. It is important to fill out these forms accurately.
This procedure waives all late penalties. You will have to pay interest on any taxes due, but this is usually not a huge amount, and is minimal compared to what any penalties would be.
The best time to do this is NOW. The IRS could take this useful procedure off the table at any moment. You can find more information on the IRS.gov website on the procedure, but consulting a tax preparation specialist is highly recommended as the procedure is lengthy and complicated.