Ask the Experts at Greenback Expat Tax Services
Renouncing citizenship, FATCA banking woes and more!
Every month, Greenback Expat Tax Services receives dozens of questions from US expats around the world. From how to save money on expat taxes to getting caught up when behind on US tax returns, there is no shortage of questions (which isn’t surprising considering how confusing expat taxes can be!) This month, we decided to share Greenback’s expert answers so all expats can benefit. Here are the top 4 questions from the previous month!
I’m overseas on a 3-5 year contract but by the 2015 tax deadline, I will not have been here for a full year yet. Can I still use the Foreign Earned Income Exclusion on my US expat tax return?
~ Carla D., Australia
Answer: Yes, Carla, you can still use the Foreign Earned Income Exclusion if you expect that in the near future you will qualify by one of the two residency tests: the Physical Presence test or the Bona Fide Residence test. The Physical Presence test requires that you be inside a foreign country for 330 days in a 365-day period and that you earn foreign income. The Bona Fide Residence test may be used when you have lived abroad for one year and have no plans to permanently return to the US.
If you are planning to use the Physical Presence test (which probably makes the most sense in your situation), you need to file a special extension, Form 2350, Application for Extension of Time To File U.S. Income Tax Return. This allows you to defer your filing until you will be able to qualify. This is an important exclusion for many expats since it can virtually offset all your US tax liability, but many aren’t aware of this extension option.
I was born in the US but only lived there for a year. I haven’t been back since, however, I just found out that this makes me a US citizen and I should have been filing tax returns all along. I’m 35 now and concerned about how many returns I will need to file and the potential costs and penalties. Help??
~ Kyle F., Canada
Answer: Kyle, you are certainly not alone! I’m hearing more and more stories about “Accidental Americans” who were unaware of their US tax obligations. While I can understand your panicked first reaction, there is no need to worry! The IRS recently made some major changes to the Streamlined Filing Procedures, which we were created to help US citizens get caught up on delinquent expat tax returns.
The process is relatively simple. You need to file the last three years of tax returns and the last six years of FBAR (Foreign Bank Account Report). FBAR needs to be filed each year if your foreign bank account(s) hits $10,000 or more at any point during the tax year. Right now, the IRS is waiving all late filing and FBAR penalties, so you won’t be slammed with unreasonable penalties. Many expats do not owe a dime to the US, thanks to money-saving deductions and credits, such as the Foreign Earned Income Exclusion. If you DO owe taxes, you will need to pay those and any interest due, but as I mentioned, all penalties are waived at this time.
I recently received a letter from my bank requesting specific information relating to my US citizenship and tax compliance. I’m worried that if I am honest about the fact that I am not caught up on my US expat tax returns, they’ll close my account. What should I do?
~Pamela E., United Kingdom
Answer: First off, Pamela, the one thing you should NOT do is ignore the letter. If you don’t respond, the bank may summarily close your account and will likely send your account information on to the IRS. So that option won’t help you at all. Your best option is to let your bank know that you are not compliant but are in the process of getting there—but be sure to actually file your back returns and get caught up if you say this! It is relatively easy to get caught up on your returns (see my response to Kyle above) so this would be a good choice.
You don’t want to lie to your bank (i.e. tell them you are compliant when you are not). It may take a while for the IRS to find you and thus, buy you some time, but if the IRS sniffs you out before you come forward, your situation goes from bad to worse. You wouldn’t be eligible for their amnesty programs and would essentially be at their mercy. So I suggest you are honest with your bank and make sure you get caught up as soon as possible. While the bank may still close your account, at least you are complying with US regulations and avoid any repercussions from the IRS!
My wife and I are fed up with US taxes and want to renounce our citizenship. Does that mean we are forever free of taxes?
~Michael and Holly G., France
Answer: You are part of a growing number of US expats feeling frustrated and disillusioned with the US based on the tax structure! There are many expats renouncing citizenship, often in a response to the FATCA (Foreign Account Tax Compliance Act) regulations that are causing banking issues for American citizens.
In the long run, you are pretty much free of US tax liability. But before you can renounce, you must prove that you have been compliant on your US taxes for the last five years, including FBARs if applicable. So you can’t simply head to the Embassy, renounce your citizenship and walk away if you haven’t been compliant.
If you are a ‘covered expat’, you may face additional taxes at the time of expatriation. You are considered a covered expat if your annual tax liability for the previous five years is above $155,000, your net worth exceeds $2 million or if you haven’t complied with US federal tax obligations for the past five years. For additional information on this, there is a video on our site that explains in more detail.
David McKeegan is the Co-Founder of Greenback Expat Tax Services, who provides expert US expat tax preparation for Americans living abroad. If you have a specific question for David, please send it to email@example.com or visit the website at http://www.greenbacktaxservices.com for more information.