Guest Post by Vincenzo Villamena
There are many rewards, as well as challenges, for Americans who choose to live outside of the U.S.
Amongst all the cultural and language barriers, there is still one fact that remains regardless of where you are living in the world –- you need to file your U.S. tax returns! There are a handful of exceptions to this rule based on your gross income, filing status and age, but they are few and far between.
One common misconception is that you don’t have to file a US tax return if you have filed and paid tax in the country in which you reside. That is not true. You must file a tax return regardless (although having paid tax in your country of residence in most cases will reduce your tax liability. The thresholds are currently:
- Single with income over $9,500
- Married filing jointly with income over $19,000
- Married filing separately with income over $3,700
The IRS has taken a renewed focus in expats living abroad and those with overseas bank accounts.
This not only applies to the wealthy who have tried to conceal their money in Swiss and Cayman bank accounts, but also those that are just living abroad and have a simple checking or savings account. The IRS considers any foreign account to be a potential tax avoidance vehicle and unfortunately by their rules, you are guilty until proven innocent. If you have over $10K (at any time of the year, cumulative in all your accounts) in foreign bank accounts, you must report this to the IRS by June 30th using the FBAR form.
If you live in a foreign country and receive income from a foreign source, you are subject to the foreign earned income exclusion. For 2011, the first $92,900 in foreign earned income is considered tax-free by the US government, however this income needs to be earned outside of the US and has limitations on items such as rental income, dividends, interest, etc. The source of your earned income is the place where you perform the services for which you received the income. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City.
Besides excluding your foreign income, it is important to note that you can also claim a credit for all foreign taxes paid in your cost country through form 1116. However, your foreign tax credit cannot exceed your US tax liability (this liability is actually determined as a percentage of your total foreign-source income divided by your total worldwide income). Any foreign tax credit amount in excess of the maximum limit may be carried back to a previous tax year or carried forward to up to 10 years in the future.
The official deadline to file your U.S. tax return in 2012 is April 17th but US expats get an automatic extension to June 15th. Even though US expats get the automatic extension to June 15th, if they owe taxes, interest accrues as of April 17th. It’s probably safe to say that it’s time to get the ball rolling on your taxes this year!
Vincenzo Villamena has extensive experience in both tax preparation and advising clients in accounting and financial transactions. He has “Big 4” audit and corporate accounting experience. Vincenzo has served as partner in 4 Corners Inc., focusing on individuals and businesses for accounting and tax preparation matters as well as advising high net worth individuals in private equity investing. He has both a Masters of Accounting and Bachelors of Business Administration with distinction from the University of Michigan’s Stephen M Ross School of Business.
You can contact Vincenzo through his website, Online Taxman.
Expatriate CPA says
April 3, 2012 at 12:41 pmSome great advice 🙂
Expartiate from the US says
October 6, 2012 at 1:24 amThank you for sharing. This is really helpful for us expats.