The new year is underway, and it’s the perfect time to get all your burning questions about expat taxes answered. We’ve compiled answers to the most frequently asked questions about state taxes, federal taxes, interest, penalties, and estimated payments for expats.
Will I Need to File a Federal US Tax Return?
Almost certainly. All US citizens are required to file an annual return even when they live overseas or if the IRS determines they do not owe. Other reporting requirements are levied against US citizens as well, including FBAR and FATCA, which are triggered by meeting different foreign bank account and asset thresholds.
Will I Need to File a State Tax Return?
State taxation is less straightforward. Whether or not you should file a return depends on the state from which you moved. Some states have “stickier” residency determinations than others, which means that these states will consider you a resident if you are tied to the state by property ownership, a driver’s license or ID card, bank or investment accounts held within the state, voter registration (including an absentee ballot), mailing address within the state, or dependents living in the state. If you have those ties, you will need to submit a state tax return and pay state taxes even if you haven’t lived there during the tax year. The four states with stickier residency rules are:
- South Carolina
- New Mexico
Some states are income tax-free:
- South Dakota
- Washington State
Most other states only require you to file a state tax return if you lived in the state during the year and, if you did, will just tax income that was generated within the state. However, in certain situations, income from sources received while living abroad may be taxed in the state, such as retirement payments or investment income including interest and dividends.
For more information on your particular state, visit the IRS’ website to brush up on the guidelines.
What Can I Do to Sever My Ties?
Closing or moving your bank account to a different state, selling your property, and changing your driver’s license to another state (if possible, one without income tax!) can help ensure you won’t end up paying state taxes on your income.
How Do I Make Estimated Tax Payments?
The IRS typically requires you to make quarterly estimated tax payments for the current calendar tax year if both of the following apply:
- You expect to owe at least $1,000 in federal tax for the current tax filing year, after subtracting federal tax withholding and refundable credits; and
- You expect federal withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current filing year’s federal tax return, or
- 100% of the tax shown on your prior tax year’s federal return (please note that this only applies if your prior year’s return covered a full calendar year – otherwise refer to 90% rule above only).
If you determine you need to make estimated payments, follow the deadline schedule below for 2019:
|Payment Period||Due Date|
|January 1 – March 31, 2019||April 15, 2019|
|April 1 – May 31, 2019||June 17, 2019|
|June 1 – August 31, 2019||September 16, 2019|
|September 1 – December 31, 2019||January 15, 2020|
Note: you do not have to make the payment due on January 15 if you file your 2019 tax return by January 31, 2020 and pay the entire balance due with your return.
The following options are available for making estimated tax payments:
- Crediting an overpayment on your 2017 tax return to your 2018 estimated tax
- Mailing your payment (in USD) with a payment voucher on Form 1040-ES
- Paying online via Foreign Electronic Payments or pay by phone using the information on page 3 of the Form 1040-ES instructions
- Paying via electronic funds withdrawal with your 2017 e-filed return
How Can I Avoid Penalties?
Two penalties can be levied against expats who do not pay estimated taxes: failure-to-pay and failure-to-file.
If you file your Federal Tax Return after your extended deadline, you can be charged a failure-to-file penalty, which is generally ten times higher than the failure-to-pay penalty. Even if you can’t pay all the taxes you owe, filing on time is beneficial because you avoid the failure-to-file penalty. This penalty is 5% of the unpaid taxes for each month it remains unpaid; however, it will not exceed 25% of your total tax bill.
The failure-to-pay penalty is ½% of the unpaid tax each month. Failure-to-pay penalties begin to accrue the day after your taxes were due. However, if you owe both of these penalties in one month, the maximum penalty for that month will be 5%.
Remember, expats get automatic two-month extensions and can get caught up penalty free by using the Streamlined Filing Procedures.
What Is the Interest on Late Taxes for 2019?
The IRS charges interest daily on the amount of tax owed, penalties, and accrued interest until the balance is paid in full. Each quarter, the IRS determines the rate of interest. As of January 2019, the interest rate for underpayment was 6% annualized. Interest penalties are rarely abated, reduced, or otherwise removed by the IRS. The IRS will correct interest penalty calculations if the tax account has retroactive changes; for example, if other penalties are abated or the tax liability is recalculated.
Don’t forget: an extension of time to file your tax return is not an extension to pay the tax owed!
Let’s Get Your Expat Taxes Finished
Greenback Expat Tax Services can help ensure you become and stay tax-compliant. Contact us today to get expert help on your expat taxes!