Frequently Asked Questions
Your US Expat Tax Obligations
Worried about your tax obligations while filing your US expat taxes? Greenback will help you understand these through our in-depth FAQs. Check it out now.
- What is the best property ownership structure for my rental property or real estate investment?
- I am looking at investment options as an American in the UK. However, there is a statute in place that prevents US citizens residing in the UK from opening new investments stateside. This leaves me with UK tax-free government investment options such as ISAs or GIAs (their versions of IRAs). What is the amount owed to the US on overseas capital gains, or is there a cap before it is applied?
- I am an overseas tax payer and I would like to purchase a property. The property will be in my name, however since according to US law all properties are shared 50/50 between husband and wife, how should we file this rental income? Is there any way to exclude this income?
- Can I be subject to AMT even when I am paying foreign taxes?
- Does the Net Investment Income Tax affect me as an expat?
- Is it true that if I work overseas as a contractor I can pay zero taxes?
- What about expat taxes for US non-residents?
- Does being self-employed change US expat tax obligations?
- As an American expat, do I need to file a US federal tax return?
- As an American expat, do I need to file a US state tax return?
What is the best property ownership structure for my rental property or real estate investment?
That really depends on your ultimate goal. The most straightforward structure is individual ownership, where you simply report the activity of the property on your 1040 (or 1040NR). However, this structure doesn’t provide you with any legal protection.
The most popular choice is the Limited Liability Company (LLC). This property type is disregarded for tax purposes, which means the activity of the property simply flows through the individual owner’s tax return while providing a reasonable level of legal protection. Reporting is slightly more involved if the LLC has more than one owner.
C-corporations offer the highest level of liability protection but also come with the most involved reporting requirements. This article goes into more detail on each property ownership structure.[back to top]
I am looking at investment options as an American in the UK. However, there is a statute in place that prevents US citizens residing in the UK from opening new investments stateside. This leaves me with UK tax-free government investment options such as ISAs or GIAs (their versions of IRAs). What is the amount owed to the US on overseas capital gains, or is there a cap before it is applied?
For your investments with your UK tax-free accounts, unfortunately, this income does not have the same tax treatment in the USA. You would need to report the full amount of the capital gains, interest, dividends, etc., on your US tax return. Technically, you should report this income each year you “earn” it on the account.
The capital gains rates for these accounts is the same as for US income. Capital gains tax rates are based on your ordinary income tax rate, with a max capital gains rate of 20% (for investments held more than one year). Investments held for one year or less are taxed at your ordinary rate.
To avoid the onerous paperwork involved with having what’s considered a PFIC (not to mention large preparation fees), you should avoid investing in ISAs that are similar to a mutual fund. Invest where you own the whole stock or bond.
If the Stocks and Shares ISAs are through a bank or financial institution, they are not foreign trusts, as the person who holds the account is the actual owner of the stocks.[back to top]
Can I be subject to AMT even when I am paying foreign taxes?
The short answer is that yes, one can be subject to AMT (Alternative Minimum Tax) even when overseas.
Expatriates utilizing the Foreign Earned Income and Housing Exclusions to eliminate or substantially reduce income should be aware of the AMT. This tax is applied to adjusted gross income (after exclusions) plus certain tax preference items and adjustments, which are reduced by an exemption and limited deductions. The exemption is phased out beginning at certain higher levels of income. An individual is subject to the AMT if it is greater than the regular income tax. If the alternative minimum tax applies, certain deductions for tax preference items may not provide actual income tax benefits. The alternative minimum tax may be reduced by the Foreign Tax Credit to the extent that tax is generated by foreign sourced income. However, the Foreign Tax Credit may not offset more than 90 percent of the tentative AMT liability. This Foreign Tax Credit is computed separately from the regular Foreign Tax Credit on a separate Form 1116.[back to top]
Does the Net Investment Income Tax affect me as an expat?
The Net Investment Income Tax (NIIT) is a regulation that went into effect Jan 1, 2013. It is part of the Affordable Care Act and applies a 3.8% additional Medicare tax on investment income. Unfortunately, expatriates are not exempt from it.
You are required to pay the NIIT if your adjusted gross income is above certain thresholds. For a single filer, that threshold is $200,000, and for a Married Filing Jointly return, the threshold is $250,000.
If you would like more details you can visit the IRS website.[back to top]
Is it true that if I work overseas as a contractor I can pay zero taxes?
Yes and no. If you are self-employed and you live overseas, you may still be required to pay self-employment taxes in the US, including Social Security. This would need to be paid before the Foreign Earned Income Exclusion (which can exclude up to $101,800 of your income from US taxation), so it is an actual out-of-pocket expense, not something that would be offset on your expat tax return. The rules are different for each country, so it is best to visit the Social Security website to see how this will work in your exact host country.[back to top]
What about expat taxes for US non-residents?
Have you lived and worked in the United States as an expatriate? Do you have investments in the US that require you to file a tax return? We have lots of clients who are US non-residents and need assistance completing Form 1040NR. If you have any questions about how you will be taxed as a US non-resident, please do not hesitate to contact our accountants for expat tax advice.[back to top]
Does being self-employed change US expat tax obligations?
If you are self-employed and you live overseas, you may still be required to pay self-employment taxes in the US, including Social Security. This would need to be paid before the Foreign Earned Income Exclusion, so it is an actual out-of-pocket expense, not something that would be offset on your expat tax return. The rules are different for each country, so it is best to visit the Social Security website to see how this will work in your exact host country. Some countries, such as the UK, require that you opt out of US Social Security (or you may need to pay both in the US and UK). This form of double taxation can add up quickly, so don’t ignore it![back to top]
As an American expat, do I need to file a US federal tax return?
Overall, all US citizens and Green Card holders are required to file a US federal income tax return each year if their income is over the minimum threshold. It doesn’t matter where you have earned this income, what currency it is earned in or whether you have also paid taxes in the country in which you reside. You are required to file in the US if your income is above these levels.
The thresholds are currently:
– Single with income over $10,300
– Married filing jointly with income over $20,600
– Married filing separately with income over $4,000
– Self-employed individuals need to file if their income is over $400
Note: You may also need to file state taxes as well as taxes for your small business operating overseas. Depending on your situation, you may also be required to file additional reports, including Form 8938 and the Foreign Bank Account Report (FBAR or FinCEN Form 114) to report assets held overseas.[back to top]
As an American expat, do I need to file a US state tax return?
When it comes to US state tax returns, every state is different. Some states are more favorable for expats, as they have no income taxes. These states include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Other favorable states include New Hampshire and Tennessee, as they only collect taxes on dividend and interest income. Unfavorable states include California, South Carolina and New Mexico; these states see their taxpayers as assets and will leave the burden of proof on you to prove you are no longer a resident.
Ties to the state that may require you to file a state return can include the following:
– Mortgage or lease payments on property
– State driver’s license
– State bank accounts or investments
– Telephone and utility bills
– Voter registration
– Library cards
– Mail correspondence
– Association memberships
– Dependents living within the state
As an American expat, if you have some of the above ties in one of the states that have income taxes, you may be required to submit a state return until you prove residency in another state.[back to top]