With greater access to technology and an increase in job opportunities abroad there is a rise in the number of Americans moving away from the US. The most typical expat is a US citizen who chose to move abroad. But, there are others who unexpectedly end up needing to file a US tax return. Find out if you fall into one of these categories and your US tax obligations.
What Does it Mean to Have a US Tax Obligation?
It means that you need to file a US tax return every year reporting your worldwide income. You also are subject to FATCA regulations regarding your bank accounts and investments in non-US banks.
What Are the Tax Implications for an Accidental American?
An Accidental American is a person who finds out that they are a US citizen by birth, and discovers their US tax obligations once they have reached adulthood. The US nationality law is complicated and complex, but most children of US citizens no matter the birthplace become US citizens at birth. While there are many benefits of being a US citizen; such as getting a US passport, voting in US elections, and being able to tap into the US government support, there are also some drawbacks. Paying taxes to the US is one of those drawbacks.
Most Accidental Americans are dual citizens of their resident country and the US, and must choose to give up their US citizenship in order to avoid IRS obligations (usually around age 18).
If you choose to keep your US citizenship, then you will need to follow the IRS rules for US citizens, which means filing a US tax return each year, and declaring all your worldwide income. Most US expats find that they do not owe any taxes to the IRS, using the Foreign Earned Income Exclusion and Foreign Tax Credit to reduce their tax liability to zero. Tax forms still need to be filed though in order to prove to the IRS you are allowed to claim the benefits.
You will also need to consider the Foreign Account Tax Compliance Act (FATCA) regulations that apply to you. FATCA requires you to report bank and financial accounts held in foreign (non-US) banks once the balance has reached certain thresholds.
Do Foreign Spouses of US Expats Have to File Too?
Many US citizens live abroad and sometimes end up marrying and starting families. The spouses of these US citizens may face a US tax filing obligation, even if they don’t become US citizens or permanent residents/Green Card holders, in essence becoming a US taxpayer themselves. A foreign spouse is generally considered to be a non-resident alien for US tax purposes.
When a US person has a non-resident alien spouse, they are limited in what filing status they can use on their US tax return. By claiming their foreign spouse as a resident for tax purposes, US citizens can take larger deductions and enjoy lower tax rates. This comes at a cost though. By claiming their foreign spouse as a resident for tax purposes, the spouse is now required to report his or her worldwide income on the jointly filed tax return with their US citizen spouse. This opens them up to potential taxes and penalties if there are any incorrectly prepared forms.
In order to claim a foreign spouse on a tax return, an ITIN needs to be obtained for him or her. An ITIN is an “Individual Taxpayer Identification Number,” similar to a Social Security number, but only for IRS use. An ITIN needs to be requested with the first jointly filed tax return, and requires submission of several forms of identification along with a properly filled out form W-7.
Along the lines of foreign spouses of US persons, the foreign stepchildren of US persons may be claimed on a US tax return. The child must fall within the rules for being a qualifying child (under age 19, lives with the taxpayers, and the taxpayer must provide more than half the support of the child), and must also obtain an ITIN from the IRS. By claiming a foreign stepchild, the taxpayer may qualify for additional deductions.
Do Foreign Nationals Traveling to the US Have To Pay Taxes?
Not only do foreign nationals find themselves subject to US tax laws while living outside the US, some find themselves traveling to the US for temporary work not realizing this also opens them up to filing a tax return! Non-resident aliens are temporary foreign travelers to the US who don’t qualify for permanent resident status. If you have traveled to the US, and have earned income while in the US (even if it is income from a foreign source), you may need to file a tax return with the IRS. Your tax return will be filed on a Form 1040NR. There are some foreign tax credits and tax treaty positions that may help to alleviate double taxation between the US and your home country, but you need to file the forms in order to prove to the IRS that you don’t need to pay the tax. Don’t assume that since you will not pay taxes anyways, you will not need to file the forms.
Non-resident aliens will need to obtain an ITIN in order to file any tax form. Some foreign companies that send many people to the US to work will help you fill out this paperwork; otherwise you will need to file form W-7 with your tax return in order to apply for the ITIN.
The reach of the IRS is long and persistent. If you find yourself in the position where you will need to file tax returns with the IRS, be sure to get expert help. The maze of forms and regulations that are required to be filed for expats is large and confusing.
When in Doubt, Seek Advice from Expat Tax Experts
Determining if you need to file a US tax return may be your first step; click here to request a consultation with one of our skilled expat accountants.