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What Expats Need to Know About Taxes

Do I have to file U.S. taxes if I live abroad?

Some Americans live abroad for a variety of reasons, professional and personal alike. Being an expatriate, however, does not relinquish one of  certain rights and responsibilities, particularly with respect to taxes. Many expatriates have misconceptions about taxation and filing tax returns, as well as reporting about money in foreign bank accounts and the tax treatment of contributions to retirement and saving plans. If you are living abroad, it is crucial to understand these obligations.

Tax Filing Requirements

Individuals living abroad are still required to file taxes in the U.S. While the Internal Revenue Code contains provisions that can reduce or eliminate an expat’s tax obligations, such as the foreign earned income exclusion (FEIE), it is necessary to file a return whether or not taxes are owed. For the 2015 tax year, income earned abroad in the amount of  $100,800 can be excluded. In addition, U.S. taxes can be offset by a credit of foreign taxes paid.

In order to claim the FEIE credit, however, a U.S. tax return, along with the Statement of Specified Foreign Financial Assets (Form 8938), must be filed on an annual basis. It is also crucial to file the return by the deadline, otherwise an expatriate might be barred from claiming the credit. If the late filing is accepted, a penalty will most likely be imposed, typically a fixed dollar amount.

Foreign Bank Accounts

In addition to filing with the IRS, expatriates are also required to file reports with the Treasury Department with respect to financial accounts greater than $10,000 in a calendar year. Any U.S. person or entity with a financial interest or signature authority over one or more foreign financial accounts must file the Foreign Bank and Financial Account Report (FBAR). If the balance of all accounts, including checking, savings, investments, pensions, and mutual funds, exceeds this amount, the FBAR must be filed.

Pensions and Savings Plans

The tax treatment of foreign pension and savings plans can be confusing for many Americans living abroad. While contributions may enjoy tax-deferral until retirement in the country of residence, this is not the case with U.S. tax treatment. The U.S. can tax both employer contributions and earnings, and if foreign tax credits are not available, an expat may have a tax liability with the IRS.

The Bottom Line

For those who have taken up residence outside the U.S., it is essential to be aware of the financial and tax implications of living abroad. Given the fact that the federal government has strict requirements under a variety of laws to track the offshore finances of American citizens, engaging the services of an attorney with expertise in U.S. and international tax law can help ensure all the necessary tax filings and reporting requirements are satisfied.

How Recent Tax Law Changes Affect Expatriates

There have been several recent changes and updates to the tax law that affect expatriates.

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