Millions of Americans living abroad fail to file their US tax returns each year — in fact, nearly half of US expats are delinquent! While US taxes have been in the forefront of the news these days, there are a few topics that may not necessarily end up on your radar. So here are 5 things you may not know about US taxes—but should.
1. Obamacare’s Impact on Expats
It may be surprising, but Americans overseas may not actually be exempt from Obamacare’s provisions. Obamacare, or the Affordable Care Act, is a new initiative created to ensure that every American has proper health care coverage. There are ‘minimum essential requirements’ that your plan must meet in order to satisfy Obamacare’s provisions and the Act applies to all US citizens, regardless of where they live. So depending on your personal circumstances, you may be required to purchase an acceptable policy. Those who don’t comply are subject to an Obamacare tax on their Federal tax returns.
Who is exempt? Well, those Americans who qualify for the Foreign Earned Income Exclusion via the Physical Presence test or the Bona Fide Residence test are exempt. At least for now. The Administration has decided that until December 2015, qualifying for the Foreign Earned Income Exclusion is sufficient to satisfy the requirements. It will be re-evaluated at that time.
What if you don’t qualify? Well, you may then be subject to the Obamacare tax which is:
- 2014 – The GREATER of $95 per adult and $47.50 per child (up to $285 for the family) OR 1% of your family income (defined as income over and above the filing threshold)
- 2015 – The GREATER of $325 per adult and $162.50 per child (up to $975 for the family) OR 2% of your family income (defined as income over and above the filing threshold)
- 2016 and beyond – The GREATER of $695 per adult and $347.50 per child (up to $2085 for the family) OR 2.5% of your family income (defined as income over and above the filing threshold)
FBAR, Foreign Bank Account Report, is part of the US initiative to uncover tax cheats hiding money in offshore accounts. While expats generally aren’t hiding money, they may still have reporting requirements. If you have $10,000 or more in foreign bank accounts at any point during the tax year, you will need to file FBAR Form FinCEN 114. This is filed electronically each year by June 30th. Penalties for not filing FBAR can be steep, so if your account balance(s) trigger a filing requirement, you are highly encouraged to file as soon as possible.
Another piece of the initiative to snuff out tax evaders is FATCA, Foreign Account Tax Compliance Act. This Act requires individuals to report certain foreign assets if they exceed the reporting threshold (which varies by residency and filing status). Assets such as foreign pensions, bank accounts, investments and hedge funds, you may need to file FATCA Form 8938. In addition, foreign financial institutions are required to report on the accounts of their American clients, which is causing quite an uproar around the world. This infographic outlines the reporting requirements and thresholds for both FATCA and FBAR.
4. Foreign Tax Credit
Many expats are familiar with the Foreign Earned Income Exclusion as a means to offset a large portion of your US tax liability. But sometimes earnings exceed the allowed exclusion—what then? Well, you may be able to use the Foreign Tax Credit to reduce your US taxation even further. The Foreign Tax Credit is a dollar-for-dollar credit on the taxes you pay to a foreign country. The one hitch is that you cannot use the Foreign Tax Credit to offset income that has already been excluded by the Foreign Earned Income Exclusion. This can be a huge help to expats who don’t qualify for the Foreign Earned Income Exclusion but still paid a large amount of taxes to their host country.
5. Streamlined Filing Procedures
If you are behind on your US tax filings, you are not alone! And the IRS has recognized how many people are in your exact situation. They created the Streamlined Filing Procedures to help you get caught up on your US taxes. This year they revised the program a bit and lifted the restrictions that prevented many expats from being eligible. The most significant change is that they have waived late filing and FBAR penalties—that’s right. No penalties! So there is no better time to become compliant. Under this program you simply file the last 3 years of taxes and 6 years of FBARs. If you owe tax to the US, you will still need to pay that and any applicable interest but those are the only additional costs. (If you reside in the US when you file, however, you will be subject to a 5% ‘offshore penalty’.)
Hopefully this provides you with some helpful information about expat tax topics you may not have been aware of. US taxes for expats can be confusing, but the more information you have, the more prepared you will be to stay up to date with your obligations to Uncle Sam!
[quote_box_center]This post was written by David McKeegan, Co-Founder of Greenback Expat Tax Services, who provides expert tax preparation services for Americans living overseas. If you have questions about your personal expat tax situation, our experienced CPAs and IRS Enrolled Agents are here to help.[/quote_box_center]