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?
- Does being self-employed change US expat tax obligations?
- What about expat taxes for US non-residents?
- What is the Foreign Housing Deduction?
- How do I qualify as an American expat?
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]
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]
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]
What is the Foreign Housing Deduction?
The IRS allows qualified US expats to deduct acceptable housing expenses from their total income. The limit changes every year and is based on a percentage of the Foreign Earned Income Exclusion. As the FEIE is increased annually for inflation, the Foreign Housing Allowance also increases annually. This is applied to a US expat tax return by attaching Form 2555.
For more information, please visit our video blog to learn how the Foreign Housing Allowance works.[back to top]
How do I qualify as an American expat?
The IRS has multiple tools in place to eliminate dual taxation, but you must qualify as an American expat to take advantage of some of them.
In order to qualify as an American expat for th foreign earned income exclusion, you must meet the following requirements:
- You must have foreign earned income.
- Your tax home must be in a foreign country.
- You must do one of the following:
- Pass the Bona Fide Residence Test – A US citizen who is a bona fide resident of foreign country or countries for an uninterrupted period that includes an entire tax year, basically meaning you live abroad with no intention of permanently returning to the USA,
- Pass the Physical Presence Test – A US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months, or
- Be a US resident alien who is a citizen or national of a country with which the United States has an income tax treaty with a non-discrimination article in effect