Tax norms for American Expats: Everything you need to know

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Often, Americans who move abroad are not aware of their tax obligations to the US government. This happens because they often live under the false belief that they are protected by a tax treaty between the US and the state of their current residence. The tax treaties that exist only serve to save American expats from paying double tax.

American expats are expected to pay tax, to reflect their worldwide income. This rule has been around since the time of the Civil War itself, brought to effect to maintain the influx of revenue for the government even with the taxpayers fleeing abroad to avoid the war.

That being said, it is only in the recent past that the IRS has started strictly monitoring and enforcing the said law globally. This obligation is known as the FATCA:

  • The Foreign Account Tax Compliance Act or FATCA requires foreign banks and investment firms to disclose their American account holders’ details with the IRS.

How to file late returns

Due to a lack of awareness, a number of expats miss out on filing their returns by the set deadline. As a result, they miss out on the benefits from a number of tax deductions.

Thus, it is to the expat’s benefit to file tax returns, even if the deadline has expired.

Those expats who miss out on filing their returns for just about a year or so can safely file their missing returns without any major repercussions.

However, for expats, who have a tax filing backlog of three or more years, they need to file for an amnesty program called the Streamlined Procedure to make up for it.

What is the Streamlined Procedure

The Streamline Procedure requires the expats to file

  • Their past three years’ returns and
  • Include the previous 6 qualifying FBAR information in addition to
  • Filing the IRS Form 14653 to self-attest the fact that their previous non-compliance wasn’t willful behavior.

This also provides them with the opportunity to claim a number of deductions that often reduce their tax liability to zero.

The late filing doesn’t lead to any penalty as long as they do so voluntarily and prior to the IRS initiating any kind of civil examination to examine the taxpayer’s returns for any taxable year.

Tax Exemptions

Expats who are paying taxes in foreign countries can claim the Foreign Tax Credit by filing the Form 1116. This allows them to claim US tax credits on the value of the foreign tax they have already paid.

Taxpayers can also claim the Foreign Earned Income Exclusion by filing the Form 2555, which allows for an exclusion of the first (approx) $100,000 of their income from US taxation, provided they can prove that they have lived abroad.

FBAR Compliance

American expats are also required to report any foreign financial holdings or accounts amounting to more than $10,000 at any time throughout the year. This requirement is referred to as the Foreign Bank Account Report or FBAR.

Another thing that the expats need to keep in mind is that filing tax returns gets even more complicated overseas. Thus, it is better to consult an expert before making the said payments. Whether it’s a professional or a team of qualified professionals, it is always better to trust experts with your tax.

With a team of qualified and trusted CPAs, MyTaxFiler can help you ace your filing process with the utmost ease. For any queries, just drop in a mail at tax@mytaxfiler.com. You can even call (888)-482-0279 for an on-call consultation.

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