Most taxpayers are aware that the traditional tax filing due date in the US is April 15th; however, some may be surprised to learn that most people living abroad need to file a US tax return, including ALL worldwide income. It’s essential to take note, as there are often items to include that differ from Americans living in the US.
Some expats are under the misconception that because they are living abroad and potentially paying taxes and filing tax returns in another country, that they aren’t required to file in the US. That’s a common and sometimes costly misunderstanding. An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which can substantially reduce or eliminate US tax liability. These tax benefits are only available if an eligible taxpayer files a US income tax return.
Filing this return for expats will require any US information received (such as Forms W-2 or 1099), as well as information regarding foreign income, expenses, and potentially taxes paid. Important items include pay stubs, foreign bank or financial institution statements, and, if self-employed, possibly information about foreign social security that may have been paid (as there are Social Security Totalization agreements in place with numerous countries). Finally, if you’ve filed a foreign tax return, you’ll need copies of that to accurately prepare your return as well.
State Filing Requirements
While the focus here is on US Federal Tax Returns, it’s important to note that some US expats also have state filing requirements, so additional information could also be required. State returns have the same due dates as the Federal (assuming no extensions of time to file have been granted). A word to the wise: do your best to plan ahead, as obtaining this information can be time-consuming.
Special income tax return reporting for foreign accounts and assets is often required
Federal tax law requires US citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires US citizens to report the country in which each account is located.
The information for this may not be quickly and readily attainable. Foreign accountants, brokerages, banks, and other people or organizations may need to be contacted and consulted. This can often take time and resources, and communication may or may not be easy.
In addition to reporting the income items from foreign banks and financial institutions on their tax returns, all US persons who have a financial interest or signature authority over anyone or multiple foreign financial accounts wherein the value is over $10,000 any time during the US tax year, must file FinCEN form 114 (known as an FBAR) each year.
Who is a US Person?
- Legal Resident
- Green Card Holder
- H1b Visa Holder
- L1 Visa Holder
- A trust formed under the laws of United States
- An estate formed under the laws of United States
- An entity created or organized in the United States under the laws of the US government
The due date to file FBAR forms for tax year 2018 is April 15, 2019 as well, although there is an automatic extension is until October 15, 2019. Note that a request for an extension is not required for the FBAR (though it is for the tax return itself).
In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, US citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.
While Form 8938 is similar in terms of FBAR reporting, it can add to the time required to prepare and review a tax return before filing.
Note: One point to be cognizant of is that the IRS requires most tax information to be in US currency, so conversions of the foreign amounts to US equivalents must be completed.
What happens if I cannot meet the April deadline?
Considering all the items and documents that are required to prepare a US expatriate tax return, knowing if there is an option to obtain a bit more time is important. Luckily, there is an option for expats who are behind and cannot complete their tax returns by the April deadline. First, US taxpayers living outside the US get an automatic 2-month extension of time to file their personal tax returns. This extends the due date to June 15th (June 17th in 2019 for 2018 taxes). No form is required to be filed to get this extension of your tax return, but you will need to indicate on your tax return that you were living outside the US to avoid penalties.
If you happen to find yourself in a situation in which you need even more time to file, it is important to be sure to file an extension. Form 4868, an Application for Automatic Extension of Time to File US Individual Tax Return, is required to be submitted to the IRS by either the April or June filing deadline(s). So, if you’re concerned you cannot make the automatic June filing deadline either, it is important to be proactive and file a traditional extension. If you don’t, the IRS can assess Failure to File or Failure to Pay penalties (assuming you have a balance due).
Need help with your US expat tax obligations?
If you need help filing your US expat tax return, look no further! Living abroad is complicated enough, and the Greenback team is here to make filing your expat taxes a hassle-free experience. Just get in touch and let us know how we can help you.