When is my tax return due?
If you are resident in the United States your initial tax return and foreign bank account report is due on April 15th, however, you can request an automatic extension to file until October 15th. Any balance due must still be paid by April 15th or you will be subject to interest and penalties.
If you are a permanent resident in a foreign country on December 31, you receive an automatic extension to file your tax return until June 15th, with an additional automatic extension available upon request until October 15th. However, you must still pay any U.S. tax you may owe by April 15 or be subject to interest and penalties.
C corporation income tax returns are due on April 15th (or 3 ½ months after their fiscal year end) with an automatic six-month extension upon request until October 15th.
Partnership and S Corporation income tax returns are due March 15th (or 2 ½ months after their fiscal year end) with an automatic six-month extension upon request until September 15th.
Do I still need to file a U.S. Return even if I make less than the foreign earned income exclusion?
Yes, the exclusion is an election that must be included either on a timely filed return; an amended return filed with 12 months of the original due date, not including extensions; or an original return filed before the IRS discovers you did not file a return and claim the exclusion. If you fail to file a return or file a return outside of these parameters and claim the exclusion there is a risk that the IRS may disallow the exclusion when you do file.
Do I have to pay tax to both the U.S. and the foreign country I live/work in?
There are two primary mechanisms which prevent double taxation, the foreign earned income exclusion and the foreign tax credit.
There are two tests which allow an individual to claim a foreign earned income exclusion in the amount of $100,800 (indexed annually for inflation) on their income tax return, the physical presence test and bona fide residence test. The exclusion is limited to the amount of earned income (salary or self-employment not investment income) If married, both spouses can received their own exclusion.
The physical presence test requires you to be outside of the U.S. for more than 330 days in a twelve-month testing period. The amount of the exclusion is based on the number of days that fall in the calendar year.
The bona fide residence test does not require counting days to satisfy the test but instead requires an individual to be a resident of one country for a calendar year. The amount of the exclusion is still dependent on the number of days outside the U.S.
The foreign tax credit is available if you pay tax to a foreign country and allows you to claim a dollar for dollar credit against your U.S. income taxes, limited to the ratio of foreign income to worldwide income.
A third, but less used option, are income tax treaties. The U.S. has tax treaties with more than 35 nations throughout the world. If a situation arises where double taxation may occur the treaty can be invoked to prevent this from occurring. The most common scenario relates to withholding taxes. The treaty may be used to reduce the rate of withholding from say 30% to anywhere from 0%-15% depending on the country and type of income.
If I don’t report income or foreign accounts how will the U.S. find out?
There are two primary ways the U.S. will receive information about foreign income and accounts, Tax Information Exchange Egreements (TIEA) contained in the tax treaties and Intergovernmental Agreements (IGA’s) as part of the Foreign Account Tax Compliance Act (FATCA).
The TIEA’s contained in the treaties are not automatic and generally require an investigation to be in progress in order for the U.S. to invoke the agreement.
The IGA’s on the other hand are automatic and the information is shared annually either directly from the foreign institution to the IRS or indirectly through the foreign government.
I am married to a non-U.S. person, do I need to include their income and assets on my tax return?
If you reside outside of the US and are married to a spouse that is not a U.S. Citizen or permanent resident (green card holder), your spouse does not have to pay U.S. taxes on their investment and employment income if you do not elect to file a joint return.
If you elected to treat your spouse as a U.S. person in order to file a joint return then all of their income and assets must be declared on your jointly filed U.S. tax return.
If I am a Green Card holder living outside of the U.S., do I still have to file a U.S. tax return?
As a Green Card holder you are a U.S. permanent resident, even if you live outside of the U.S., and are treated the same a U.S. resident or citizen and must file a U.S. tax return each year on your worldwide income. However, you can still use the foreign earned income exclusion discussed above if you qualify.
If I am living and working abroad, do I have to file a U.S. state return each year?
While living abroad, if you take the proper steps to terminate tax domicile or residency in your previous home state (the rules vary from state to state), you no longer have to file a state income tax return and as a result eliminate your state taxes! California, Virginia and New Mexico are several of the states that make it very difficult to terminate your tax residency when moving abroad. Nevada, Washington, Texas and Florida have no state personal income taxes at all!
The state you left from will look at your intent to return to the state after your stay abroad, and various indices that may indicate you never planned on giving up your "tax domicile" such as if you still maintain a state drivers license; state voter registration; library card; bank accounts; real property; license plates for your car; or if you children still go to school in the state.
If a non-U.S. person living outside the U.S. gives me a gift is it taxable?
Gifts of cash and other non-U.S. intangible property from non-U.S. persons to anyone are not subject to U.S. taxation. However, if the amount exceeds USD $100,000 it must be reported.
A gift of tangible property such as a car, house, artwork, etc. are subject to tax if the property is in the U.S. at the time of the gift. To avoid the tax the donor should provide cash sufficient to buy the tangible property instead.
If I own an interest in a foreign entity or my U.S. company has a foreign subsidiary do I have to report that on my U.S. tax return?
There are different types of entities, e.g., partnership, corporation, and disregarded entity, each of which carries different reporting requirements depending on how much of the foreign entity you own.
A foreign disregarded entity owned directly by a U.S. person is always reported on the owners U.S. tax return and the net profit or loss is included on that return
A foreign partnership is generally reported in the first year of the U.S. person acquiring 10% or more and in subsequent years if there are certain reportable events or if the U.S. person controls the foreign partnership. The U.S. partner’s share of the partnership net profit or loss is also includable their U.S. income tax return.
A foreign corporation generally reported in the first year of the U.S. person acquiring 10% or more and in subsequent years if there are certain reportable events or if the U.S. person controls the foreign corporation. The U.S. shareholder’s share of the corporation’s net profit or loss is generally no includable their U.S. income tax return until the foreign corporation makes a distribution of profit, which is generally reported as dividend income.
What are the penalties for failing to file or report foreign income or assets?
In most cases the penalties for failure to report income are the same as underreporting domestic income.
There are additional penalties for failure to file the information returns such as the foreign bank account report Form 114; foreign financial asset Form 8938; ownership of foreign corporations on Form 5471; or receipt of foreign gifts on Form 3520. The failure to file or filing incomplete forms are USD $10,000 per form per year.
Both the non-compliance penalties and the late/non-payment penalties can be abated for reasonable cause, however, the interest charged on late/non-payment of tax cannot.