Moving Abroad - US Tax Considerations
by Craig Pellet, CPA
So, you’re fulfilling your dream of living abroad. Here is general information about what you have to do to comply with American tax law after you move.
Yes, you still have to file a federal tax return. All U.S. citizens must report their worldwide income each year. The same filing thresholds apply, whether you are in-country or overseas.
Returns for expatriates are generally due June 15th, although interest on any balance due will begin to accrue after April 15th. If you cannot get your paperwork done on time, you can request an extension until October 15th, and another 2-month extension to December 15th.
But that doesn’t mean that you will pay lots of tax. Many expatriates are subject to income tax in their resident country. U.S. tax law has two provisions that allow expatriates to escape double taxation.
First, the Foreign Earned Income Exclusion (FEIE) allows expat workers to avoid U.S. tax on a certain amount of earned income, that is, wages and self-employment income. You qualify if you remain outside the U.S. for nearly 12 consecutive months, or if you can establish that you are a “bona fide resident” of a foreign country. In 2022, you can exclude income up to $112,000. The exclusion is adjusted each year for inflation. Claim it by filing Form 2555 with your tax return.
The second option is the Foreign Tax Credit (FTC). Whether you live abroad or not, you can reduce your obligation to the IRS for taxes already paid on that same income overseas. This way, you avoid paying twice. Claim it by filing Form 1116 along with your federal return.
It is possible to combine the two options. If your foreign earned income exceeds the FEIE maximum, and you pay tax on your income to your country of residence, you can claim the FTC on the income over and above that FEIE maximum.
You will have to disclose bank account information to the Treasury, twice, maybe. All U.S. citizens, abroad or not, must disclose their bank account information to the Treasury Department, possibly on two separate forms.
1) FinCEN Form 114, commonly called the “FBAR,” is required if the aggregate maximum value of your non-U.S. bank and securities accounts exceeds $10,000. Include the full value of any jointly held accounts, as well as any accounts where you are not the owner, but have signature authority. No tax is due with this form. Penalties for non-compliance are harsh.
The FBAR is filed separately from your income tax return. The FBAR is due by April 15th with an automatic extension available to October 15th. You don't need to file a separate extension for the FBAR. The FBAR must be filed online through FinCen.gov. A professional preparer can file the FBAR for you.
2) Form 8938 contains much of the same information as the FBAR. However, there are substantial differences. The filing thresholds are much higher, and more complex. Some assets that are not reportable on the FBAR are reportable on 8938 (and vice versa). For example, if you hold shares of a foreign corporation outside of a brokerage account you may need to report that asset on Form 8938, but not the FBAR. Accounts where you have only signature authority, and no financial interest, are reportable on the FBAR, but not 8938. It is important to review each form’s instructions to determine which assets get reported where. This form is due with your tax return.
Investing outside the U.S.? Be careful. Mutual funds and ETFs marketed to non-U.S. persons are rarely suitable investments for U.S. citizens. Many are Passive Foreign Investment Companies (PFICs), which have an onerous and unfriendly tax treatment in the U.S.
Tax-advantaged accounts in your new country of residence are likewise treacherous to U.S. investors. Most of those accounts are not tax advantaged in the U.S., so what you don’t pay your resident country, you will pay to the U.S.. Examples of this include, but are not limited to, Canadian Tax Free Savings Accounts (TFSA) and Individual Savings Accounts (ISAs) in the United Kingdom.
Retirement accounts are tricky. The tax treatment of your foreign retirement account will depend on lots of things, including the country you live in, the type of account, and whether you or your employer made the contribution. Speak with us or your tax advisor about the specifics of your situation.
Here are some details about two of the friendliest countries for U.S. citizens with retirement accounts:
Canada – The Registered Retirement Savings Plan (RRSP) is respected by the IRS as a tax-advantaged retirement account. Growth in the account is not taxable, and the account is not subject to foreign trust reporting requirements.
United Kingdom – The U.K./U.S. tax treaty allows for contributions to retirement plans as well as growth in those plans to be excluded from income. Distributions are taxable in the country of residence.
Other countries have considerably fewer retirement account provisions. The taxation of some, like the Australian Superannuation, are hotly debated in the tax community. Speak with us or your tax advisor before filing.
Tax treaty positions require their own disclosure. If you do take a tax position based on a treaty, be sure to disclose the position on Form 8833.
A word of caution: Be sure to check to see if the treaty article is covered by the Saving Clause or not. The Saving Clause is a paragraph of a treaty that usually says that the U.S. can tax its citizens as if the treaty had not come into effect.
Possible action items:
• Foreign trusts, estates, corporations or partnerships? Seek professional advice.
• Forms and requirements related to these foreign entities are very complex. Speak with your tax advisor, or contact John Schachter + Associates today. We are well-versed in the intricacies of tax preparation for Americans with foreign interests.
