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US Expatriates and Tax Responsibilities

By Maurice M. Glazer, CEO
Glazer Financial Network

If it’s January it must be tax season…. Many U.S. citizens and lawful permanent residents of the U.S. (green card holders) move to another country and forget or choose not to file a tax return in the U.S. But be warned: The U.S. requires you to file a tax return accounting for your worldwide taxable income—and the statute of limitations never runs out.

In many cases, you may have few or no U.S. taxes to pay, thanks to exclusions and deductions that you may qualify for as an expatriate. But you definitely are required to file if you are a U.S. citizen or resident alien. Not filing can create major issues. For instance, if you live abroad for 10 years and then return to the United States, the penalties and interest you’ve accrued may be more than the actual tax.

The U.S. Internal Revenue Service (IRS) is working with the State Department and with the Immigration and Naturalization Service (INS) to improve compliance with the tax return requirement.

One bit of good news: A U.S. citizen or resident alien doesn’t need to file a tax return unless gross income for the year is over a certain amount. The amount varies depending on your tax status (see below).

Minimum Income for Filing A Non-Resident Tax Return

For 2009 taxes, you don’t need to file a return unless your gross income is above the following amount:

  • For a married couple filing a joint return: $18,700
  • If one spouse is over 65 years old: $19,800
  • If both spouses are over 65 years old: $20,900
  • For a single filer: $9,350
  • For a single filer over 65 years old:   $10,750
  • Head of household: $12,000
  • Head of household over age 65: $13,400
  • For a qualifying widow or widower:  $15,050

Also if you have W-2 income withholding tax or if you have income from self employment, where self-employment tax is due.

Even when you’re required to file a return, you may be able to reduce or eliminate your U.S. taxes, thanks to the foreign earned income exclusion, the housing exclusion and deduction, and the tax credit you get for any foreign taxes you’ve paid. For 2009, you can exclude from taxes up to $91,400 of income you’ve earned abroad ($91,500 for 2010). The housing exclusion and deduction are living expenses above $40.07 per day for 2009.

Legal ways to zero out taxes

Fortunately, there are also deductions from gross income that you can take. See Section 911 of the tax code for these. You can also deduct foreign housing costs that you paid, or that were paid on your behalf, which are above the base amount.  You need to file these items on form 2555 or form 2555 EZ.  According to the IRS, it’s important to file these forms even if you’ve earned less than the amount you’re allowed to exclude.

U.S. citizens and long-term permanent residents can also take a credit for taxes paid to a foreign government.  This credit is explained in section 901 of the income tax code. You report the tax credit on form 1116.

Almost half of those filing non-resident tax returns show no tax liability because of these two codes, Sections 901 and 911.

Additional forms to complete

If you’re self-employed and no foreign social security is being withheld from your earnings, you must file a Schedule C with your U.S. tax return and pay U.S. self-employment tax on your net earnings (that is, after deducting your expenses).  The self-employment tax is 15.3%. It is not reduced by the foreign earned income exclusion or by foreign tax credits.

If you own more than a 10% ownership in a foreign corporation, you are required to file a special form reporting that interest.  If the corporation is making a profit, it will be a “controlled foreign corporation,” and you could owe U.S. tax on its earnings.

If you are a beneficiary or a trustee of a foreign trust (for instance, a fideicomiso), or you have a bank account with a balance over $10,000, you must also file a special form, 3520 the first year and 3520A each succeeding.

You can be fined up to $10,000 or more for not filing any of these forms—and since there is no statute of limitations, the fines can be levied many years from now when the IRS and Hacienda (Mexico’s tax department) finally start sharing information. You can also be liable for individual state income taxes.

Changing citizenship to avoid taxes: Not advisable

There is a special tax on former citizens and long-term permanent residents whose main reason for moving to a foreign country is to avoid U.S. income tax or estate and gift taxes.  Section 877 imposes this tax regardless of your reason for changing citizenship and moving abroad.

You’re subject to this tax if you’re an expatriate with a net worth of $500,000 or more (adjusted for inflation), and if your average annual net income tax liability for the five years before you left the U.S. was $100,000 or more.  All expatriates who are subject to this tax under the code have to submit a statement of residence and citizenship and a statement of assets and liabilities.

If you fall into this category, the IRS automatically assumes that you’ve changed your citizenship and/or moved abroad to avoid taxes in the U.S.

There is only a small class of high net worth expatriates who are not assumed to have moved or changed citizenship for tax reasons. This class is also described in Code Section 877. If you think Section 877 may affect you, it’s worth checking to see if you fall into this group.

This exempted class of expatriates consists of the following:

  • Expatriates who were dual citizens at birth and who have remained citizens of the second country;
  • Expatriates who, at the time they became expatriates, were citizens of their birth country, or of the birth country of their spouse or of either of their parents;
  • Expatriates who were in the U.S. for no more than 30 days each year during the 10 years before they became expatriates;
  • Expatriates who renounced U.S. citizenship before they reached age 18 ½.

The Internal Revenue Service has begun many programs to identify non-filers and to improve compliance.  In the Middle East alone the number of returns filed has increased by 51% due to compliance programs.

The IRS created Form 2555EZ to simplify filing.  It also revised Publication 593—tax highlights for U.S. citizens and residents going abroad—to encourage taxpayers to file. In addition, Publication 519—the U.S. Tax Guide for Aliens—and the instructions to Form 1040 NR (non-resident) make former citizens and long-term resident aliens aware of their potential tax liability under Section 877.

The IRS has also put a number of programs in place to identify non-filers.  If you are an expatriate and aren’t filing your U.S. taxes, keep in mind that eventually you’ll be identified as a non-filer.  And like elephants, the IRS never forgets.

Glazer Financial Network (Maurice M. Glazer); tel. (888) 553-7059, (800) 999-8931 or cell phone (469)358-2818; email: mglazer@glazerfinancial.com.

IRS Circular 230 Notice: The statements contained herein are not intended to and do not constitute an opinion as to any tax or other matter. They are not intended or written to be used, and may not be relied upon, by you or any other person for the purpose of avoiding penalties that may be imposed under any U.S. Federal tax laws or otherwise.

©2009 – Glazer Financial Network and The Pension Specialists, Inc.

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