Who Needs to File
As a US citizen living abroad, you must file a tax return reporting your worldwide income. So whether you live full time offshore, work anywhere in the world, collect interest/dividends/capital gains, receive retirement benefits, work for any employer, pay tax in a foreign country, own your own business or work for an employer . . . in other words, no matter what the scenario . . . a US tax return must be filed.
The United States is unique in many ways, and tax law fits right in, because in every other country tax returns are filed and paid based upon residency.
For us Yankees, it is based upon citizenship . . . and for this reason many expats get confused and do not really understand their tax filing responsibilities.
You are required to file a US return once you earn any money that you can call your own if you are:
- a dual citizen
- spouse of a foreign taxpayer
- child of a US citizen who has inherited US citizenship
- born or lived in the US and now are working abroad
If you’re concerned because you never filed before, there is a six-year statute of limitations. This means you can file for the last six years and you are off the hook for all prior periods (as long as you owe no tax).
You may ask yourself, why file? I’ve never done it before.
The reason to file is simple: the US is making it very difficult to renew a passport, or even get into the country if your returns have not been filed.
Filing does not mean you Owe or Pay
Most expat tax returns are strictly informational. As a US citizen living abroad you may be entitled to a foreign income exemption of about $92,000 or a foreign tax credit based on the tax you pay to your country of residency . . . or perhaps a combination of both, that will not only wipe out any US tax, but also may entitle you to some carryovers that may help you out taxwise when you return to the States.
In addition, depending upon your income and your individual situation, you may receive a special housing credit to further reduce US tax liabilities.
Key to the preparation of a US tax return is the residency requirements to receive the foreign income exemption.
You must be offshore at least 330 consecutive days. What is important here, and what most foreign tax preparers do not understand, is that it can be 330 days within the time frame that the tax return is due including extensions.
For example, let’s say you move April 1. You will have until October 15 of the following year, or about 15 months, to meet the 330 day residency test.
The preparation of an expat tax return is quite different from preparing a stateside return, and most preparers have very little experience in this arena. It’s important that you choose a tax preparer who is familiar with expat tax issues.
Diane Siriani is a Certified Public Accountant in Bingham Farms, MI. She has a full-service accounting/tax firm and income tax service in Wyandotte, MI and a global website called Expatriate Tax Returns. She’s very proud of her knowledgeable and service-oriented staff.
(If you’d like to use Diane’s tax service, just click the link above and enter the code EXPAT 2011 for a 20% discount.)