Welcome to Life Abroad - Top 10 Expat Tax mistakes
Updated: Jan 31
In this series, I will present an overview of the common requirements that apply to MOST U.S. Citizens and Green Card holders living abroad. This article should not replace the advice of a competent U.S. accountant specializing in foreign taxation. In addition, the U.S. has various tax treaties with individual countries, which can dramatically affect what types of income are taxable in the U.S. or the country of residence. This article applies to worldwide expat tax issues in general, as well as how they apply to Israeli residents.
The average U.S. citizen or Green card holder ("U.S. person") has two main annual requirements to report to the U.S. government.
1. Report worldwide INCOME to the Internal Revenue Service
2. Report foreign financial ASSETS to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of Treasury (details here)
Individuals may be required to file additional reports to the IRS annually or occasionally to report, among other things, owning a foreign corporation or partnership, receiving gifts over $100,000 from a nonresident or foreign estate, or giving over $14,000 to someone other than a spouse.
For simplicity of language, I'm going to assume "you" are a U.S. citizen or green card holder living outside of the U.S.
Today we'll deal with #1. It doesn't matter where in the world you live, if you have income, it must be reported to the IRS, usually on a Form 1040 U.S. Individual Income Tax Return.
Needing to file an income tax return does not necessarily mean you will owe taxes. Most people earning an average salary and paying taxes to their country of residence (tax deducted at source, for most Israelis) won't owe taxes, and may even be eligible for a refund if they have children, or payed for undergraduate college.
Whether you need to file an income tax return depends on whether your gross income meets the filing threshold determined by your filing status. The IRS has resources to determine your filing status, such as interactive questionnaires and Publication 501. I will also cover this topic in a future post.
I've been asked about the most common mistakes I see. The #1 mistake is not filing at all. However, if you haven't filed an expat tax return before, here are 10 things you should be aware of:
Your default due date is June 15 (or the following business day). Your accountant will probably automatically file an extension for you until October 15. Don't be surprised if your foreign accountant doesn't feel the same pressure to get your return filed by April 15 that you may instinctively feel. However, hiring an accountant and getting them your information early is the best way to get attentive, timely service.
There are three main ways to avoid double taxation. (1) You may receive a Foreign Tax Credit (Form 1116) for taxes paid to your country of residence. (This is not refundable, but may carry over to future years.) (2) Your income may be exempted by the Foreign Earned Income Exclusion on Form 2555. However, this may preclude you receiving a child tax credit. (3) Certain sources of income may be exempt under a tax treaty, in which case this position would be disclosed on Form 8833.
In most cases, tax treaties will relieve you from double taxation. However, if you are self employed, you may be paying social security to two countries. For example, if you are a private contractor living in Israel, you will pay self-employment taxes to the United States and "betuach leumi" to Israel.
If you have a bank account outside the U.S. be sure that the bottom of Schedule B (reporting interest and dividends) is filled out correctly, even if you would not otherwise be required to file Schedule B.
If you got married to a foreign person or in a foreign country, you are still MARRIED for U.S. tax purposes. Your spouse's name should appear on your Tax return. If you did not change your name with the U.S. Social Security Administration, you must continue filing under the name that matches your Social Security Card.
You may not claim the Earned Income Credit (EIC) if you live outside the United States for more than 6 months of the year. It doesn't matter what address you use on your tax return.
You probably won't have a U.S. Form W-2, which specifies what is taxable, so it is important that your tax preparer understands your foreign wage and tax statement (such as the Israel Form 106, UK Form P60, Australia PAYG, or Canada T4) so they can include all taxable income, including employer pension contributions.
If you have over $200,000 in foreign bank or financial accounts outside the U.S., you may need to report them on your tax return (Form 8938) in addition to the FBAR (covered here). Contact your accountant or see IRS instructions for details.
If your tax return while living in the U.S. was only a few pages, it may now be looking more like a novel, including treaty disclosures and information that you never needed to report before, such as travel to the U.S. and information about your employer.
If you believe you may have filed a tax return with a mistake, don't hesitate to contact your local accountant. Fixing a mistake now, rather than when the IRS realizes, can save you penalties and interest. Filing an accurate return the first time can save you money long-term in credits and voluntary elections.
Make sure your accountant is experienced in expat tax issues and understands your long-term income and family situation so they minimize your tax now and in the future. Don't hesitate to get a second opinion if something doesn't sound right, especially if an accountant wants to amend a tax return to get you a refund. Amending tax returns can be expensive; you may end up with a headache and no net gain.