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?

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.

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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.

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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?

Unfortunately, there is no exclusion limit on rental income. The exception to this would be if owning and renting properties is your only job; in that case, you can use the Foreign Earned Income Exclusion (although you would likely still be liable for self-employment taxes).

As far as reporting the income from the property, if you are the sole owner, you must report 100% of the income from the property. If you own it jointly with your spouse, you can report 50% of the income.

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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.

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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.

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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.

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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!

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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.

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What is the story with Form 8938 (Statement of Foreign Financial Assets)?

The IRS has introduced a new requirement for individuals with higher account balances held overseas as part of the FATCA legislation and this reporting is done via Form 8938. This form must be submitted with your US expat tax return. US expats who meet the requirements of the Physical Presence Test or the Bona Fide Residence Test are required to submit this form if they have foreign financial assets of:

  • Single Filers — more than $200,000 on the last day of the tax year or over $300,000 at any time during the tax year.
  • Married Filing Jointly — more than $400,000 on the last day of the tax year or over $600,000 at any time during the tax year.

Please note that the limits are significantly lower for taxpayers living in the USA.

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What is the Foreign Earned Income Exclusion (FEIE)?

The IRS has many tools in place in order to reduce double taxation. One of those tools is the Foreign Earned Income Exclusion (FEIE). If you qualify as an expat, you are able to exclude up to $101,300 of your foreign earned income from US taxation via Form 2555 in 2016. Note that this amount cannot be deducted from any income earned inside the United States. Also, government employees (including military service members) are unlikely to qualify for the Foreign Earned Income Exclusion.

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