10 Things Every U.S. Expat Should Know This Tax Filing Season
As we begin the 2017 tax filing season, there are several items that all U.S. expats should keep be aware of:
1) Stating the Obvious – You Need to File a U.S. Federal Income Tax Return Even if You Did Not Earn Any Income in the U.S.!
Although this may appear obvious to some people, many U.S. expats don’t realize that as long as they maintain their U.S. citizenship (or green card in the case of lawful permanent resident), they are required to annually file a return with the IRS and report their worldwide income unless they are exempt due to age and income amount (see below). This may sound frightening to some, but there really isn’t any reason to be worried. Many U.S. expats are entitled to significant tax breaks (such as the foreign earned income exclusion and foreign tax credits) and, as a result, often do not incur a U.S. tax liability.
U.S. expats that meet the age requirement below and their income does not exceed the amounts listed below, are generally not required to file a return:
- Under 65 – $9,750
- Over 65 – $11,200
- Married filing jointly
- Under 65 (both spouses) – $19,500
- 65 or older (one spouse) – $20,650
- 65 or older (both spouses) – $21,800
- Married filing separately (any age) – $3,800
- Self-employed – and earn less than $400 of income
2) Inflationary Adjustments & the Foreign Earned Income Exclusion
The foreign earned income exclusion amount has been adjusted for inflation and currently stands at $95,100.
Housing exclusion/deduction base amount – Since the housing exclusion/deduction computation is tied to the earned income exclusion, the base amount is higher this year and stands at $15,215. In addition, the cap on housing expenses that can be deducted in specific localities has been adjusted. For a full list of the housing expense limitation per city, please see IRS Notice 2012-19. http://www.irs.gov/pub/irs-drop/n-12-19.pdf
Tax brackets adjusted for inflation – The Federal income tax brackets for 2012 have been increased slightly. For detailed information regarding the Federal income tax brackets for 2012, please see Rev. Proc. 2011-52 at http://www.irs.gov/pub/irs-drop/rp-11-52.pdf
Personal and dependency exemption increase – The personal and dependent exemption has also been adjusted due to inflation for 2012 and stands at $3,800. Phaseout amounts for the personal exemption are not yet reintroduced for 2012 (but they will be in 2013).
Standard deduction – The standard deduction has increased for married couples filing jointly to $11,900 and for singles to $5,950.
3) Self-employment Tax Rates and Caps Remain the Same
For 2012, the temporary 2% reduction in self-employment tax remains in effect. As a result, social security tax for self-employed will be 10.4% with a cap of $110,000 ($11,450). Medicare tax remains 2.9% with no limit.
4) Foreign Tax Credits
Income taxes paid to foreign jurisdictions can generally be credited against your U.S. taxes. In most cases, U.S. expats who earn a salary while living overseas will be able to claim a credit based on the taxes withheld on their foreign W2 equivalents. In this respect, it is important to make sure to keep all supporting documentation of your foreign W-2 equivalents.
5) FATCA is for Real – The IRS Wants to Know About Your Specified Foreign Financial Assets
U.S. expats with “specified foreign financial assets” with an aggregate value of over a certain amount (see below) are required to report these assets to the IRS in their 2012 U.S. Federal income tax return using Form 8938. Specified foreign financial assets generally include balances in foreign bank accounts, investments account and financial instruments or contracts that have an issuer or counterparty that is not a U.S. person. I, addition, included in this definition is stock or securities issued by a non-U.S. entity if held directly (i.e., not through a foreign financial institution)This is the second year this reporting requirement is in place and starting next year, the IRS will also be receiving reports directly from foreign financial institutions (FFIs).
For U.S. expats the exemption from Form 8938 is much more generous than for U.S. citizens living in the U.S. To qualify for the higher filing thresholds, you must satisfy either the bona fide residence test or the physical presence test.
- U.S. expats who do not file jointly are required to file Form 8938 only if the total value of their specified foreign assets is more than $200,000 on the date of the tax year or more than $300,000 at any time during the tax year.
- U.S. expats who file a joint return are required to file Form 8938 only if the total value of their specified foreign assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
U.S. expats who maintain foreign bank accounts are required to report the balances in these accounts to the IRS by June 30th if, at any time during the year, the aggregate balance in all of their foreign bank accounts was $10,000 or more. This filing is done via Form TDF 90-22.1 and no extension to file is available. FBAR penalties for failing to report foreign bank accounts can be as high as $10,000.
7) Mortgage Interest Deduction on Foreign Home
If you took a foreign mortgage to purchase your home overseas, you can deduct the interest on your foreign mortgage assuming you meet the same requirements applicable to a domestic home. These requirements are: (i) that you itemize your deduction (by filing Schedule A); and (ii) that the loan be secured by a qualified home. A qualified home includes your main home and a second home of your choice. In addition, real estate taxes are also generally deductible.
In this respect, it is important to keep in mind the following points:
- Certain restrictions may apply if the foreign home is your second home and portions of the home are rented out.
- Your interest on the mortgage must be reported in USD and, therefore, you need to take into account the appropriate exchange rate.
8) College Tuition Overseas – The American Opportunity Tax Credit is Still Available for 2012
The American Opportunity Tax Credit (which expanded the existing Hope Scholarship Credit) allows a credit for expenses paid for tuition, fees and course materials for the first four years of post-secondary education and which were incurred in 2012. With respect to tuition fees, the tuition must be paid to an accredited institution listed on the Department of Education’s list of accredited institutions. The list includes more than 100 foreign universities and colleges and, therefore, can prove beneficial to U.S. expats studying overseas. Unlike the Hope Scholarship Credit, expenses paid for course related books, supplies and equipment need not be paid directly to the accredited institution.
You can search for a particular school at the following link https://fafsa.ed.gov/FAFSA/app/schoolSearch?locale=en_EN
The credit provides a maximum annual credit of $2,500 and is fully available to those with adjusted gross income of up to $80,000 ($160,000 for married couples filing jointly). The credit is phased out for taxpayers with income above these levels. Most notable is the fact that 40% of the credit is refundable ($1,000).
9) US Tax Filing Deadlines
Your U.S. federal income tax returns are due by April 15th, 2013. However, U.S. expats living outside the U.S. on April 15th are granted an automatic 2-month extension. No forms need to be filed to take advantage of this automatic extension. In addition, you can request an extension until October 15th, 2013 by filing Form 4868. Keep in mind that even if you take advantage of either extension, the extension does not apply to the payment of tax. Therefore, if you owe tax, you will be required to pay the tax by April 15th regardless of your extension.
10) Higher income tax rates – not this year!
There’s been a lot of talk about the increase in individual tax rates following the Congress’ resolution of the fiscal cliff crisis. As many of you have heard, individual tax rates are set to increase with the highest rate rising to 39.6%. Certain taxpayers with higher incomes will also be subject to a higher capital gains tax rate (20%) and a special healthcare tax of 3.8%. However, NONE of these changes come into effect until the 2013 filing season and will not be relevant for your 2012 return!
Joshua Ashman, CPA – Expat Tax Professionals