Top 5 Reasons Not to Worry if You’re Behind with your US Expat Tax Filing
There are lots of scare stories going around about the possible consequences for not filing US taxes as an expat. You may have heard for example about US passports being revoked, sizable FBAR penalties, and banks closing expats’ accounts because of FATCA. So if you’re an expat who’s behind with their US tax filing, you may well be at least a little bit concerned.
We’re here to let you know however about several good reasons why, so long as you act now rather than do nothing, you won’t have to worry anymore.
Reason 1 – You’re not alone in choosing to catch up
The US and African minnow Eritrea are the only two countries in the world that require expats to file, so it’s not surprising that US expats find it shocking when they first find out. But you’re in good company: every year, thousands of US expats who weren’t previously aware that they had to file US taxes from abroad find out and choose to catch up and become compliant like you.
Reason 2 – There’s a way to catch up without facing any penalties
Now for the best news you’re going to hear all week: there’s a special IRS amnesty program for expats who are behind with their US tax filing because they weren’t previously aware that they had to file that lets them catch up without facing any penalties. It’s called the Streamlined Procedure, and to catch up you have to file your last 3 federal tax returns, your last 6 FBARs (if required), self-certify that you’re previous failure to comply wasn’t willful avoidance, and pay any US back taxes that you may owe. Talking of back taxes…
Reason 3 – You probably won’t owe any US back taxes (but you still have to file)
More good news: there are some exclusions available to expats to prevent them from paying US taxes on top of taxes in their country of residence. In fact, for the first up to around $100,000 of expats’ income, there’s no US tax due whether you’ve paid taxes in another country or not, so long as you meet one of two conditions.
This particular exclusion is called the Foreign Earned Income Exclusion, and it allows expats to exclude up to around $100,000 of their income (the exact figure rises a little each year) from US tax.
“It’s true that most expatriate Americans end up with no U.S. taxes to pay on their worldwide income, because they can exclude some income and offset host country taxes against what remains. Yet all must file and many do pay, because anomalies are rife.”
To do so, they must prove either that they are a permanent resident in another country, or that they spend at least 330 days outside the US in a 365 day period that overlaps with the tax year.
Some expats who pay taxes in another country though may be better off claiming the Foreign Tax Credit, which gives a $1 tax credit for every $1 of tax paid abroad.
There are some other exclusions available to expats too, such as the Foreign Housing Exclusion, however in all cases you have to file to claim them. The good news though is that all these exclusions can be claimed in retrospect if you catch up using the Streamlined Procedure, so that with the right strategy given their particular circumstances most expats won’t end up owing the IRS a dime.
Reason 4 – Dreaded FBARs aren’t in fact that scary
FBARs, or Foreign Bank Account Reports, must be filed by expats who have at least $10,000 in total in bank and other financial accounts held abroad at any time during the tax year.
The good news is that FBARs are fairly straightforward to file. FBARs are filed online to FinCEN (form 114), and are due by October 15th. You have to provide your name and contact details, along with details about all your accounts (account numbers, maximum balances etc), and details about the banks or other financial firms where your accounts are help.
Most foreign financial firms are providing the same information to the IRS now, so while it’s a filing requirement that shouldn’t be ignored any longer, it’s also not too hard a one to rectify.
Reason 5 – Getting help doesn’t cost the earth
Some expats are afraid that the cost of hiring a expat tax specialist firm to prepare their back taxes is prohibitive, however in actual fact it’s not. In fact, expat taxes specialists normally save expats more money than they cost, as they are experts at finding the right strategy and claiming the right exemptions depending on each expat’s circumstances. So at the very least get a quote from an expat specialist firm before deciding to try and go it alone.