Americans Helping Americans Abroad

Tax 101 Seminar - February 15th, 2018

Led by Tim Ramier (This email address is being protected from spambots. You need JavaScript enabled to view it.), Chair of the AARO tax committee, with the assistance of Mojgan Ghanipour (This email address is being protected from spambots. You need JavaScript enabled to view it.), CPA.

The “Maison Verte” at Reid Hall was filled to capacity for this event, an introduction to US taxes for overseas filers.

Frequently referenced throughout the meeting are the IRS website (https://www.irs.gov/) and more specifically, Publication 54 (https://www.irs.gov/pub/irs-pdf/p54.pdf).

Who must file?

All US citizens and resident aliens, wherever they live, must file if they meet certain filing thresholds. A resident alien is a permanent resident, a “greencard” holder, even if that person is not currently living in the US.

The specific filing thresholds can be in Publication 54, under “Filing Requirements”. The most commonly used are: Single ($10,400), Joint ($20,800), Married Filing Separately ($4,050). If you are self-employed, the threshold drops to $400. During Q&A, the question of filing when you have a foreign spouse was brought up: most file as “married filing separately”; you are not “single”.

You need your own Social Security Number (SSN) in order to file and you may want a tax identification number for your foreign spouse (ITIN), in order to qualify for the standard deduction for your spouse when you file. If this is the first time, you can include the form W-7 (https://www.irs.gov/forms-pubs/about-form-w7) with your tax file.

To calculate whether you meet the threshold, you must add up your gross worldwide income: salaries, wages, tips, interest, dividends, capital gains, rents, and so on. This is what will be included on your form 1040.

When do we file?

April 15 is the deadline for filing in the US. Overseas filers have an automatic extension to June 15 and they can request, before the June 15 deadline, an extension to October 15. The extension request form is sent to the Austin office.

If you think you owe tax, you should have an estimated tax by April 15, though, in order to make payment without being subject to penalties.

Where do we send the file?

If you owe no tax, send it to the Austin, TX office and if you owe tax, send the file, including payment, to the Charlotte, NC office:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215 USA

Internal Revenue Service Center
P.O. Box 1303
Charlotte, NC 28201-1303 USA

What do we need to file?

You need your SSN and, if you have it, your spouse’s ITIN or the W-7 form requesting the ITIN.

You also need your payslips and any other financial information you need to declare, such as savings account interest, dividends, and so on.

Estimated tax payments

If you owe $1000, or more, in taxes for 2017, then you should make estimated payment of your 2018 taxes either by full payment upfront or by quarterly payments before April 15, June 15, September 15 and January 15, 2019

Failure to pay estimated tax can lead to heavy penalties and fines.

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is commonly referred to as FEIE or the 911, referring to the law, U.S. Code 911, that created the exclusion.

To benefit from this exclusion, you must have established residency outside the United States, either Bona Fide permanent residence or by passing a physical presence test showing 330 days outside the United States in a consecutive 12-month period.

In France, on your payslips, you have the “net imposable”, which is for your French declaration and you also have your “brut” (gross) salary. You may deduct the social security (medical) payments from the gross to determine the amount to declare to the IRS.

The earned income exclusion is $102,100 for 2017. You will fill out form 2555.

For some, it is more beneficial to use an income tax credit, form 1116, instead of the FEIE. For income over the FEIE threshold, you will use form 1116, also.

Tax credits and deductions

To claim a tax credit for foreign income tax paid, use form 1116.

You can also itemize deductions such as medical expenses (not including insurance), charitable gifts, fees, investment expenses, and perhaps, for French residents, the CSG and CRDS levied on income.

Whether or not to claim the CSG and CRDS as an expense is still in question. There is a case in the US that has been sent back to the court, which originally denied the deduction. The feeling in the tax profession is that the deduction can be claimed, in good faith, and if the new decision is against the deduction, amended returns can be filed at that time.

Tax treaty benefits

There is a tax treaty in place between the US and most countries to deal with all sorts of tax issues. You can find the treaty with your host country at https://www.irs.gov/downloads/irs-trty

Concerning the treaty with France (https://www.irs.gov/pub/irs-trty/france.pdf), Article 24 deals with “Relief from Double Taxation”. There is further reference to Article 29 for pension income, which is only taxed at the source.

Information Reporting

These are reports. They do not have tax directly linked to them. However, the penalties for not reporting are severe.

FBAR

The Foreign Bank Account Report, known popularly as FBAR, or technically as FINCEN 114, is a report of your financial accounts -- not just bank accounts -- if the total amount of those accounts is $10,000 or more at any time during the year. There are heavy penalties for not filing ($10,000 per account per year of not filing, non-willingly) and extremely heavy penalities for willful non-compliance.

The FBAR is due by October 15, 2018. It can only be done by e-filing (https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html). There, you have a choice to either download the pdf file or do it directly, on line. If you download the pdf, you can fill it in at your own pace and upload it for the e-signature when you are ready before the due date.

*Reporter’s note: There are some time-saving techniques if you use the download method and save a copy to your computer. Next year, check to site’s pdf to see if there are no changes to the form. If there are none, then you can open your form from the previous year, remove the signature, change the date and just change the amounts for each account, add new accounts, and remove closed ones. If there are changes in the form, you can download the new form and after opening the old form, just copy and paste the account information into the new form.

FATCA

The Foreign Account Tax Compliance Act, known as FATCA, is for taxpayers, form 8938. For overseas residents, the filing threshold for this form is $200,000 ($400,000 for joint filing). It is similar to the FBAR, but it goes to the IRS and not FINCEN. There are also references to where you declared any income from the accounts on your 1040.

During Q & A, a question about why the banks are balking over FATCA. Banks have different FATCA reporting requirements. They either refuse to take on US person customers or require the US person customer to fill in form W-9. A non-US person, on a joint account, for example, is required to fill in form W-8 BEN.

Investments

  • PFICs (Passive Foreign Investment Companies) are, for the most part, foreign mutual funds. Form 8621. You must declare the income from these funds, but since foreign accounts do not declare income in the same manner as in the US, it is not a simple declaration. The IRS estimates that it takes 15 hours and 4 minutes to fill out Form 8621. In France, these are SICAVs, and most Assurance Vie packages. It is best to avoid them.
  • 10% or more shares in a company. Form 5471. This is a one-time report of share ownership. Up to 50% ownership, there is no need to file every year or anything more.
  • Gifts and legacies from a foreign person, such as a foreign spouse or parent. Form 3520. There is no tax linked to this report, but failure to report can lead to difficulty down the line if there is a question as to where the money came from.
  • Interest in a partnership. Form 8865. This concerns 50% or more shares owned directly or indirectly (a family business) and requires extensive annual reports.

Streamlined offshore compliance

If you have not been reporting your income to the IRS or your FBARs to FinCEN, then you should consider coming into compliance. The streamlined procedure has been in place for several years and can be cut off at any time. To come into compliance, you need to send in 3 years of back tax files and 6 years of back FBARs. Once compliant, you need to continue being compliant. https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures

Exchange Rates

Average exchange rates, for your income: https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

Year-end exchange rates, for your FBAR and, if needed, form 8938: https://www.fiscal.treasury.gov/fsreports/rpt/treasRptRateExch/currentRates.htm

And special thanks to Tim and Mojgan for answering so many questions and to Mathieu for his technical assistance and video-recording of the event. The video will be available to members of AARO.

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