Moving abroad is the adventure of a lifetime, however before the adventure begins, there’s plenty of planning to do. An important aspect of this planning for Americans moving abroad is understanding the tax implications of the move, to ensure that you pay as little tax as possible and avoid penalties, which can be applied even if you weren’t aware of their obligations.
Tax Planning Tips for Americans
This article was contributed by Hugo Lesser @ Bright!Tax. Hugo is an expat taxation expert and works with American expatriates around the globe to advise them on global taxation issues. In this article, we have asked Hugo Lesser to provide some tax planning tips for Americans moving abroad. Expat Financial and it’s owner do not provide tax or legal advice – the article below provides general tips only. Note that you must consult with a tax advisor before making any tax decisions.
1 – Understand US filing rules for expats
Americans still have to file a US tax return after moving abroad. This is because, unlike other countries, America taxes all US citizens on their worldwide income, rather than solely US residents.
Americans living abroad receive an automatic filing extension until June 15th, and they can request further time if they like by filing Form 4868, the same as Americans like in the States.
2 – Research foreign country tax rules
Every country’s tax rules are different, and it’s important to research the tax rules for the country you’re moving to before arriving.
The first question to find out about is: what qualifies you to have to pay foreign taxes there? In some countries, it might be the number of days in a year you’re in the country for, in others where your income is sourced, and in others still whether you own a home in the country or not.
Knowing the foreign country tax rules lets you plan your move in a way that minimizes your foreign tax liability, so saving you money.
3 – Reduce your US tax bill
When it comes to filing your US tax return from abroad, there are additional forms that you can file to reduce your US tax bill.
Americans abroad who have to pay foreign taxes in their destination country can file IRS Form 1116 to claim the US Foreign Tax Credit, which allows them to offset the foreign taxes they pay. As many countries have higher income tax rates than the US does, many Americans living abroad eradicate their US tax bill this way.
Alternatively, Americans abroad with earned income can file Form 2555 to claim the Foreign Earned Income Exclusion. The Foreign Earned Income Exclusion allows expats to exclude the first $107,600 of their earned income.
Which of these IRS provisions it’s best to claim depends on each expat’s circumstances.
4 – Report foreign accounts, assets, and businesses
Many Americans who live abroad open bank accounts in their new country of residence, and sometimes other types of financial accounts, such as stock or pension accounts. These Americans may have to file a Foreign Bank Account Report or FBAR, to FinCEN, the US financial crimes authority.
FBAR filing is required by any American who has a total of over $10,000 in their combined foreign financial accounts at any time during the year. Penalties for not filing (or for inaccurately or incompletely filing) FBARs are high, even if the American didn’t know they had to file, and the Treasury is receiving information directly from foreign banks and investment firms.
Americans with a total of over $200,000 of foreign financial assets may also have to report them on IRS Form 8938. Americans who have interests in a foreign registered business may have to report it when they file their US tax return.
5 – Check whether you have to file state taxes from abroad
Some Americans still have to continue filing state taxes from abroad. Whether they do or not depends on the rules in the state where they last lived. While most states are happy to let former residents go, others want to know more about how long they plan to live abroad, and whether they still have ties in the state, such as property, dependents, or bank and investment accounts.
6 – If you’ve already moved abroad but didn’t know you had to file
If you’ve already moved abroad but haven’t been filing your US taxes because didn’t know that you had to, there’s an IRS amnesty program that lets you catch up without facing penalties, and while still claiming the IRS provisions that allow you to reduce your US tax bill.
The program is called the Streamlined Procedures, and it requires filing the last three years of federal returns and up to the last six years of FBARs (for the years when they are required), and self-certifying that your previous non-compliance wasn’t willful avoidance.
7 – Ensure your accountant is an expat specialist
Filing US taxes from abroad is more complex, with additional forms to file and reporting requirements. There are multiple ways to approach it, so doing so in a way that ensures not only compliance but also in your best long-term interests is a specialist area of accounting.
As such, most expats benefit from seeking assistance from an expat tax expert, rather than filing themselves or retaining the accountant they normally use in the US.
Note that Expat Financial, a division of TFG Global, was not paid a fee for this article.
Bright!Tax is a leading, award-winning US expat tax services provider with clients in over 190 countries worldwide.