Frequently Asked QuestionsAbout U.S. expat taxes for Americans overseas
1. Foreign Bank Account Report (FBAR) and do I need to file it?
FBAR stands for Foreign Bank Account Report. It applies to FinCEN Form 114 and you have to file it if you have a financial interest in, or signature authority over, foreign financial accounts with an aggregate value of more than $10,000 at any time during the calendar year.
The following types of accounts are considered to be foreign financial accounts:
- Bank accounts, including savings, checking and time deposits
- Financial accounts in a foreign branch of a U.S. bank or financial institution
- Mutual funds that you hold an interest in the fund
- Insurance policies or annuity contracts with a cash value
- Securities accounts, i.e. brokerage accounts and foreign stock held in a foreign financial institution
You do not need to claim the following on the FBAR:
- Domestic mutual funds that invest in foreign stocks
- Personal property that is held directly
FBAR is filed with the Department of the Treasury and you submit FinCEN 114 electronically through the BSA e-filing site. This form is also required if you hold joint accounts. Your spouse needs to sign this form, as it allows you to file on their behalf. However, if your partner has other accounts and you are not on them, they will need to file their FBAR separately for the individual account.
There is also Form 8938 and a U.S. expat must file it:
- If a single individual or married person who is filing separately holds assets, with a total value exceeding $200,000 on the last day of tax year, or more than $300,000 at any time during the year
- If a married person is filing jointly, the total value of their assets has to be more than $400,000 on the last day of the tax year, or more than $500,000 at any time during the year
You report the maximum value of specified foreign financial assets, such as accounts in foreign financial institutions and certain other foreign non-account investment assets, such as trusts, partnerships, corporations etc. You file this form with your annual return and due on the date of that return, including any available extensions.
- If you non-willfully fail to report FBAR, there is a penalty of up to $10,000; if it is done willfully, then the penalty is up to $100,000, or 50% of account balances. Criminal penalties may also apply
- The penalty for Form 8938 is up to $10,000 and then an additional $10,000 for each 30 days after an IRS notice that you didn’t file. The potential maximum penalty is $60,000 and criminal penalties may also apply
Don’t worry or panic if you didn’t know about your filing obligations and so haven’t filed for years. The IRS is aware of the fact that many U.S. expatriates don’t know about their tax obligations to the U.S. government. Thus, it has introduced amnesty programs, such as the Streamlined Foreign Offshore program. There is no late filing or FBAR penalties anymore, providing there was a reasonable cause, which means that you can catch up with your taxes in the best way possible. You will need to file the last three years of Federal Tax returns (if you haven’t filed them yet) and the last six years of FBARs, together with a certification statement.
Our expert IRS Enrolled Agents have helped hundreds of Americans abroad to successfully file their FBARs and we would be glad to help you too. Contact us now.
2. What is Foreign Account Tax Compliance Act (FATCA) reporting?
FATCA was introduced by the U.S. government in 2010 and it requires U.S. taxpayers to report foreign financial assets to the IRS, for example, foreign bank accounts, foreign stock, mutual funds, and foreign life insurance or partnership interests. FATCA applies to people who are treated as U.S. persons for tax purposes or people with links to the U.S. These include people with U.S. nationality, whose place of birth is the U.S., or have an American mailing address or telephone number.
American expats must file Form 8938 (FATCA form) with their tax return if one of the following conditions apply:
- Married people filing jointly whose aggregate value of specified foreign financial assets exceed $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
- Single people, married people filing separately or heads of households whose aggregate value of the specified foreign assets exceed $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
This has an impact on banks worldwide as foreign financial institutions are required to cooperate with the IRS. Otherwise, it will result in a 30% withholding tax on all American assets. Under FATCA, financial institutions must report information on certain account holders, including the name, address, U.S. Taxpayer Identification Number, account number, balance, certain receipt of payments and other such information the IRS may require directly or through the local competent authority. Financial institutions are also required to report certain information about the owners of non-U.S. entities that are substantially owned by U.S. persons.
If you fail to file Form 8938, despite meeting the IRS’ reporting requirements, you may be penalized with a $10,000 to $50,000 fine, depending on whether the failure continues after you have received a notice of your status from the IRS. Additionally, any tax underpayments can also trigger a 40% understatement penalty. It’s important to remember that Form 8938 is not the same as FBAR. Filing FATCA, if your assets meet the filing threshold, will remove any negative consequences that you may face if you do not report it.
Our tax experts have helped U.S. expats with FATCA reporting for five years and we would be glad to help you too. Contact us now.
3. Do married couples need to file FBARs separately if they both have separate foreign bank accounts?
Yes, if a married couple has separate foreign bank accounts, they both need to file FinCEN Form 114 (FBAR) separately if the total aggregate value of all the foreign accounts exceeds $10,000 at any time during the calendar year. Each person must report their own foreign accounts and is responsible for ensuring that the FBAR is properly filed. If one spouse files the FBAR but not the other and the FBAR requirement applies to both, the non-filing spouse may be subject to penalties.
3. What is 1040 form and what do I need to know about it?
Any U.S. person that is required to file a tax return has to use a 1040 form. The form alone comes in three variations: 1040EZ, 1040A, and 1040. They vary, depending on the complexity of the taxpayer’s income, allowable deductions, tax credits etc. The 1040 is divided into different sections, where you report your income and deductions to calculate the amount of tax you owe or the refund you can expect. Depending on your income type, you may need to attach other forms and schedules to it.
You will need to prepare the following information to file your 1040 tax form:
- Proof of identification
- Filing status and Residency status
- Your Social Security Numbers for you (plus those of your spouse and any dependents)
- Your dates of birth (plus those of your spouse and any dependents)
- A copy of your past tax return
- Statements of wages earned (e.g. W-2, W-2G, 1099-R, etc.)
- Statements of interest/dividends from banks, brokerages etc.
- Proof of any tax credits, tax deductions, or tax exclusions
- Your bank account number and routing number (for Direct Deposit)
In the income section, you will fill in information about the types of income that you have earned. Remember that you will need to have documentation to explain how you have earned this income and prove that the amount reported is true, including:
- Wages and salaries
- Taxable interest – Schedule B
- Ordinary dividends
- Returns, credits, or other offsets and local income taxes
- Alimony received
- Business income (or loss) – Schedule C or C-EZ
- Capital gains (or losses) – Schedule D
- Other gains (or losses) – Form 4797
- IRA distributions
- Pensions and annuities
- Rental real estate, royalties, partnerships, S-corps and trusts – Schedule E
- Farm Income
- Unemployment compensation
- Social Security benefits
- Other income
The IRS will determine your tax liability, based on the details that you provide on this form. The schedules are used to provide more detailed information regarding your source of income. You must convert all of the monetary figures into U.S. dollars.
The Adjusted Gross Income section allows you to claim specific deductions or adjustments. It is an important number as AGI affects many deduction limitations. You can also claim deductions for the following:
- Education expenses
- Certain business expenses – Form 2106
- Health savings account deductions – Form 8889
- Moving expenses – Form 3903
- Penalty on early withdrawal of savings
- Alimony paid
- IRA deductions
- Student loan interest
- Tuition fees paid
- Other deductions
The Tax and Credits section starts with your adjusted gross income. It’s significant as many limitations are based on this number. There are personalized exemptions, standard deductions and itemized deductions that can decrease your taxable income even further. If the amount of your incurred deductible expenses during the year is higher than the standard deduction, use this number to decrease your taxable income. You will need to use Schedule A to use the itemized deduction. This is also where you can claim the Foreign Tax credit to balance out the U.S. tax you owe.
The other taxes section has additional taxes that you cannot offset with the Foreign Tax credit, such as self-employed tax or Net Investment Income Tax. If you live abroad and do not pay Social Security, you will have to file Form 8965, Health Coverage Exemption and check that you have lived abroad during the year. You will face a penalty for not having the health coverage exemption.
The last section is about payments. If you qualify for the Additional Child Tax Credit, for example, you can claim it here. Or if you paid too much tax or have no tax owing, but are eligible for the Additional Child Tax Credit and receive a refund. We are passionate about helping American expats to become and stay tax compliant by helping them to correctly fill out the forms. Check out our services now.
4. How do I avoid double taxation as a US expat?
As an American expat, you will want to prevent the double taxation of income earned when you live abroad, as well as reduce or eliminate your obligations. The following are a few provisions that can help U.S. expats to avoid double taxation, which is all valuable under different conditions:
- Foreign Earned Income Exclusion
- Foreign Tax Credit
- Foreign Housing Exclusion
- U.S. Income Tax Treaties
The Foreign Earned Income Exclusion (FEIE) allows you to exclude a part of your foreign-earned income from U.S. taxations if you can prove your residence abroad for the tax year. To qualify for FEIE, you must meet either the Bona Fide Residence Test or the Physical Presence Test. To be considered as a Bona Fide resident of a foreign country, you have to be a tax resident of a foreign country (reside in the foreign country) for an uninterrupted period that includes an entire tax year and prove that your intent is to establish a permanent, indefinite residence in the foreign country. To qualify under the physical presence test, you must be physically present in a foreign country for at least 330 full days in any 12-month period. Travel days over international lands or waters must be taken into account for this test.
A Foreign Tax Credit is useful for any expat who has paid taxes overseas. This option does not require a person to prove residence in a foreign location. If you work abroad or hold foreign investments, it is likely that you have paid taxes to a foreign government. If the tax rate of that country is equal to or greater than the U.S. tax rate, the Foreign Tax Credit will successfully offset any U.S. tax owing assessed on that amount.
Additionally, a U.S. expat with wages or self-employment income can exclude housing costs abroad. You can claim an exclusion (if you are salaried) or a deduction (if self-employed) from your gross income for your housing expenses if your tax home is in a foreign country and you qualify under either the bona fide residence test or the physical presence test. You must qualify for the FEIE, and only those amounts that have been paid for with employer-provided funds may be excluded. The IRS is very specific about the housing expenses that can be claimed. These are:
- Rent, or the fair rental value of housing that is provided by your employer
- Utilities (except for telephone charges and pay TV services)
- Necessary repairs
- Property insurance (including contents)
- Fees for securing a leasehold
- Occupancy taxes
- Residential parking
- Rental of furniture and accessories
On the other hand, domestic help, mortgage payments, and purchased furniture cannot be claimed.
The U.S. government has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate or are exempt from U.S. taxes on certain items of income they receive from sources within the U.S. These reduced rates and exemptions vary between countries, and specific items of income. Most income tax treaties contain a “saving clause” which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income. If the treaty does not cover a particular kind of income, or if there is no treaty between your current residence country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return.
439 University Avenue - 5th Floor
Toronto, ON M5G 1Y8
1732 1st Ave #29692
New York, NY 10128