Paying taxes is a necessary evil, but U.S. expats and foreign citizens living in the States have a tickler tax picture than most. Cross-boarder professionals (i.e., working professionals living in a country other than their country of birth) face a far more complicated and confusing tax picture than most people. Having financial affairs outside of the U.S. invariably creates a unique tax situation. And failing to correctly pay taxes puts you at risk for major fines and penalties. The tentacles of the U.S. federal tax law reach farther than those of almost other country. Anyone with financials ties to the U.S falls under the jurisdiction of their stringent regulations. Here are five tips for making your tax life a little less taxing…
- Report All Foreign Accounts. Failure to report foreign bank accounts and other investment holdings can result in big penalties, sometimes even as much as the entire account balance. Owners of foreign accounts with higher balances must include Form 8938, Statement of Foreign Assets, with their U.S tax declarations. Foreign Bank Account Reporting (FBAR) filings must also be done separately for accounts totaling over $10,000.
- Report All Income To The IRS. Many people still believe that what they earn abroad is no business of the United States. Not so. The U.S. is the only major tax system employing a worldwide tax based on citizenship, regardless of where your live. This means that even if you already are paying tax to a foreign authority on your foreign income, you still need to report it to the IRS and potentially pay U.S. tax.
- Move Any Taxable Investment Accounts To The U.S. In case you haven’t heard, the IRS does not like U.S taxpayers to own investment accounts located outside the U.S. borders. With the numerous scandals over the past decade involving foreign banks helping U.S. taxpayers to evade taxes, there is now much greater awareness about the inappropriateness of foreign investment structure for US taxpayers.
- Report Foreign Rental Income. Many cross-border families own property abroad. Often they’ll hold onto a former home as an investment, and begin renting it out to create a passive income source. This often makes people wary about reporting property on their U.S tax return. They shouldn’t be. In most cases, these foreign rental properties are already taxed in the country where they are located, and that foreign tax becomes a credit against any potential U.S tax.
- Keep Track Of The Capital Gain Exemption On A Former Residence. If a taxpayer owns a home that has appreciated significantly, he or she should be careful about converting that property to a rental. The U.S. federal law grants a $500k tax exemption to marrieds couples ($250k if a single filer) on gains from the sale of a primary residence. This applies to foreign residences as well, so long as the the taxpayer lived there for at least two years. However, this exemption can be lost over time and may be prorated if the property is subsequently rented out once the homes was not a primary residence for at least two of the previous five years. So, if the taxpayer moves away and sells the house more than three years after he or she no longer lives in it, any gain from the sale will be fully taxable.
Learning to navigate tricky tax situations can be painful, but it is a small price to pay for the benefits of global existence. Give Bourke Accounting a call today at 502-451-8773 or stop by for a visit so we can help you navigate your financial situation. See you soon!