An Expat Tax Planning Guide for Americans & Residents Abroad

Expat Tax Planning Guide for Americans and Residents Abroad

The Expat Tax Planning Guide

For expats who are considered to be U.S. persons for tax purposes, such as United States Citizens, Lawful Permanent Residents, and foreign nationals who meet the substantial presence test, they may have an annual tax and reporting requirement even though they live overseas — and even if all of their income is sourced from foreign sources.  That is because the United States follows A worldwide income tax model, which means if a person qualifies as a US person for tax purposes, then they are subject to US tax on their worldwide income no matter where they live. This is different than most other countries which only require worldwide income tax for taxpayers who are considered residents of their country. Here is our new updated expat tax planning guide for US taxes to assist expats with understanding the basics of expat tax filing.

 U.S. Person Tax Status

The first thing to consider is the expat’s U.S. Person tax status. The reason why this is important is because if an expat lives in certain countries that have a treaty with the United States, then depending on whether they are a US citizen or resident can impact whether they may qualify for certain tax benefits under the treaty. Therefore, it is important to determine whether the taxpayer is a citizen, lawful permanent resident, or foreign national who meets the substantial presence test.

A Form 1040 or 1040-NR?

depending on whether the expat is still considered to be a US person for tax purposes or not will determine which tax return they’re required to file. US persons, including those who live abroad, are required to file Form 1040. For taxpayers who are considered non-us persons but actually have US-sourced income, they are required to file a form 1040NR to report their US-sourced income.

Is a Tax Treaty Election Available?

Some taxpayers who are considered US persons for tax purposes but reside overseas in a treaty country may qualify to make a treaty election to be treated as foreign persons for U.S. tax purposes. By doing so, the taxpayer would only be subject to US tax on their US-sourced income and not their worldwide income.

Is a Substantial Presence Exception Applicable

If a person only qualifies as a US person because they met the substantial presence test then they may qualify for certain exceptions and exclusions from a substantial presence. One of the most common exceptions is the closer connection exception, which means that if the expat can show they have a closer connection to one or more foreign countries than they do to the United States, then they may avoid U.S. person status for taxes.

Foreign Earned Income and Housing

For taxpayers who are required to file Form 1040 and are employed overseas, they may qualify for the foreign earned income exclusion. Taxpayers can exclude upwards of $110,000 each year from their annual income, along with a housing exclusion. In addition, filers who filed jointly or each are able to claim the foreign earned income exclusion and housing (but cannot double dip on the housing). Thus a couple filing jointly living overseas may qualify to exclude upwards of  $250,000 a year from their tax return.

Foreign Tax Credits

A taxpayer may also qualify for foreign tax credits if they have already paid taxes overseas. Thus, a taxpayer who is required to file Form 1040 to report their worldwide income may also file Form 1116 to claim credits against their US income tax liability by applying taxes they have already paid overseas.

Does the Expat Have Foreign Accounts?

Taxpayers who have foreign bank and financial accounts are required to file various international information reporting forms each year depending on the category of account and the value of their assets. When it comes to foreign accounts, some of the more common forms are the FBAR, Form 8938, and Form 8621.

Does the Expat Have Foreign Assets and Investments?

If an expat has foreign assets, they are also required to file various international information reporting forms. Common types of assets may include cryptocurrency, pooled funds, and foreign real estate Taxpayers who have foreign real estate are required to report their income and expenditures on their US tax return but typically do so by filing a form Schedule E similar to if they have a US property.

Is the Expat Non-Compliant for Prior Years?

For Expats who have been non-compliant in prior years, it may be overwhelming trying to consider getting back into compliance based on all the fear-mongering and inexperienced attorneys/accountants providing false or misleading information online. The Internal Revenue Service offers various offshore amnesty programs that taxpayers can use to safely get into compliance.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.