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Expat Tax Discontent among Overseas American Communities

In 2005, NASA Astronaut Leroy Chiao, the commander of the tenth expedition to the International Space Station, was orbiting above Earth on an 8-month long mission in space when April 15 rolled around. For those who don’t know, that is the usual U.S. tax deadline. One would assume the IRS may make an exception for such an extraordinary circumstance, but no, Chiao had to manage his taxes in space.

Chiao may seem like a crude outlier to the IRS’ rigorous enforcement on tax collection. After all, he is physically so far from home, shouldn’t he have been qualified for an exemption from tax obligations at least for the duration of his mission in space? But this isn’t something unusual to American expats. The U.S. is one of the very few, precisely one of two, that taxes the worldwide income of nonresidents who are citizens. Millions of Americans currently living abroad are subject to the U.S. taxes even if they left many years ago and haven’t returned home since. It is a curious system in which citizens who take no advantage of tax-funded public infrastructure still have to bear the civic duty.

Often, it isn’t the amount of tax one actually pays that causes so much distress to American expats. The biggest tension seems to come from the reporting requirements and the penalties for failing to report. Both FATCA and FBAR require expats to report their international banking and financial holdings information. Some banks, fearing the restitution from the IRS, began to turn away American customers. The majority American expats consider the law to be unjust, which widens the emotional gap with their mother country.

The widespread displeasure is leading some expats to make a drastic decision. Just take a look at the number of the U.S. citizenship renunciation. In 2015, 4,297 Americans renounced their US citizenship. That is a 20 percent increase from 2014, which was also a record breaking year. The trend now suggests that the number will only increase from here on out.

When the news broke out about 27 profitable companies that avoided taxes, many expats expressed their discontent with the system. United Continental, for instance, through tax allowances, erased what amounted to be a $1.5 billion tax bill, and it is just one of many American corporations practicing similar tax policies. Mirror that to $12.6 million the U.S. government collected since fall of 2014 just from citizenship renunciation fees- which now is widely believed to be another tactic to squeeze more money out of American expats. It’s not hard to see how the current system that cracks down on expats can look and feel unforgiving to those currently being affected by the law.

The American expats around the world are raising their voices however. According to the State Department, 7.6 million (the estimation varies) Americans currently live abroad, which would make for the 13th biggest American state in terms of population. Democrats Abroad sends 21 delegates to the Democratic primaries which is two more than what the state of Wyoming sends. According to Rothermere Institute, both parties’ supporters abroad donated about $6 million to the 2008 race as well. It is tough to measure exactly how much political influence American expats can have. They are scattered throughout the world and far from home. Regardless, the efforts to gather a strong voice continue to unfold around the world, and expats may soon be heard by the general American public.

Till the actual law changes, expat tax filing will remain as a highly complicated task. Complying with the current systems is, for now, the only advisable and safe way of expression. Otherwise, the IRS would impose hefty penalties and additional interests. No one wants to deal with the IRS, let alone pay them extra money. Expat tax filing needs to be done accurately to avoid further complications, and it is important that expats work with real professionals. If you haven’t filed your 2015 tax return, now is the time to start.

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Married a Foreign Spouse? Your Tax Filing Status Should be…

shutterstock_40624609One of the most frequently asked questions from our expat clients is, “I just married a (German, Dutch, English, etc) husband/wife, how does this affect my tax situation?” As all American citizens bear the tax filing responsibility regardless of their current residence, marrying a non-U.S. citizen can complicate the process. Before deciding anything, the couple should at least be aware of advantages and disadvantages of different options.

After marriage, you are now given two choices when deciding your filing status. You can either file married separately or jointly. After all, if you file jointly, your spouse’s income will be taxable which may put you in higher tax brackets. But then again, the government provides couples with far more deductions and benefits. Individual cases will dictate which filing status would be more beneficial, but these following questions should be discussed.

  1. Which tax bracket would the combined income land in?
  2. Would the combined income qualify for reporting requirements such as the FBAR?
  3. Would the combined income affect your qualification for the foreign earned income exclusion?

Advantages & Disadvantages of Filing Jointly

Advantages:

  • Far higher standard deduction and lower tax brackets
  • Generally easier and less time consuming

Disadvantages:

  • Spouse income will be taxable in the by the U.S. tax laws
  • Combined income may exceed the minimum reporting requirement which may result in more reports to file

 

Advantages & Disadvantages of Filing Separately

Advantages:

  • Spouse income will be not taxable in the U.S.
  • Legal protection for yourself as filing separately somewhat removes you from your spouse’s wrongdoings

Disadvantages:

  • Lost deduction, exemption opportunities
  • Possibility of being placed in a higher tax bracket

 

At the end, what is recommended to an American expat married to a foreign spouse is that they, as a couple, consult with experts to weigh both options. And it is important to note that if you want to include your foreign spouse in your U.S. tax return, your spouse will have to apply for an Individual Taxpayer Identification (ITIN) using Form W-7.

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Which Passport Guarantees the Most Access in International Travels?

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Nothing like an unexpected visa requirement to put a damper on international travelers. If an American were to travel to Bolivia with Canadian friends, the American would be the only one to get held up at the border because the Bolivian government requires a travel visa from American travelers. Visa requirements, with the varying degree of difficulty to obtain, certainly restricts the freedom of mobility of many citizens around the world. However, for national security reasons, some countries implement stricter rules against concerning countries.

So which countries maintain such a good diplomatic relationship that their citizens are allowed to enter a number of countries without much suspicion? Here is a list of countries with the most number of visa-free access.

 

 

 

 

 

Top 10 Countries

1) Germany — 177

2) Sweden — 176

3) Finland, France, Italy, Spain, UK — 175

4) Belgium, Denmark, Netherlands, U.S. — 174

5) Austria, Japan, Singapore — 173

6) Canada, Ireland, Luxembourg, Norway, Portugal, South Korea, Switzerland — 172

7) Greece, New Zealand — 171

8) Australia — 169

9) Malta — 168

10) Czech Republic, Hungary, Iceland – 167

 

And in case you are curious, here are the bottom 10 of the list.

 

Bottom 10 Countries

94) Liberia — 43

95) Burundi, North Korea, Myanmar — 42

96) Bangladesh, Democratic Republic of Congo, Lebanon, Sri Lanka — 39

97) Kosovo, South Sudan, Yemen — 3

98) Eritrea, Ethiopia, Iran, Nepal, Palestinian Territory, Sudan — 37

99) Libya — 36

100) Syria — 32

101) Somalia — 31

102) Iraq — 30

103) Pakistan — 29

104) Afghanistan — 25

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Important Tax Deadlines to Remember in 2016

shutterstock_164415176The tax filing deadline fast approaches. If you are still putting together all necessary documents, you should be wise and become aware of different deadlines coming up. As for expats, the regular tax schedule doesn’t apply completely, so mark your calendar accordingly after this blog post!

Deadlines

  • April 18th– Usually the tax filing deadline in the U.S. is April 15th, but thanks to the Emancipation Day holiday, everyone gets a 3-day extension this year. If you, as an expat, wishes to delay the filing date, you can trigger the automatic 2-month extension by simply not filing your taxes by April 18th.
  • June 18th– The automatic 2-month extension ends on this day, meaning expats will have to file by this date unless they are requesting for another extension.
  • June 30th– This is the day to electronically report all your foreign bank and financial accounts (FBAR) information. The Bank Secrecy Act may require you to report overseas accounts every year, so it may be wise to remember this date for the coming years.
  • October 15th – Whatever the reason behind the extensions, as long as you properly request for one, you can delay the filing till this date. This is the last possible deadline to file your U.S. tax return. You will have to pay taxes owed to the IRS on this date to avoid failure-to-pay and failure-to-file penalties.

 

54 days remain till the first deadline, and if you feel unprepared, get in touch with us right away. We offer online tax consultations to our potential clients, helping you identify necessary documents and filing requirements.

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Another Record-Breaking Number of U.S. Expats Renounce Citizenship

 

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Americans line up in front of the Consulate General in China

4,279 U.S. citizens renounced their U.S. citizenship in 2015. That is a 20 percent increase from 2015, which was also a record breaking year. The trend now suggests that the number will only increase from here on out.

The spike in the number is largely due to the increased reach of the United States’ citizen based tax system. The IRS imposes the reporting duty to all Americans- even the “accidental” Americans who were born in the U.S. but never lived in the U.S. With the increased scrutiny and enforcement of the overseas and banking and reporting laws, many feel that their citizenship has lost its merits.

The American expats are required to report their worldwide income on a tax return every year. They also have to report their foreign bank and financial accounts. For non-compliance, American expats can expect hefty penalties and a possible criminal charge. The Foreign Account Tax Compliance Act, also known as FATCA, in particular placed more pressure on taxpayers and foreign banks. The IRS can fine banks that refuse to disclose the information of its American clients. For instance, Swiss UBS AG was fined over $780 million by the U.S. Treasury Department for its role in “hiding” Americans’ accounts information. Fearing the consequences, some foreign banks are refusing to provide services to American clients.

Contrary to popular belief, renunciation isn’t the magical solution to all these issues. First, in order to renounce, you must pay a $2,350 fee and take a formal oath at the U.S. Embassies or consulates. Then you actually have to resolve outstanding issues with the IRS. The applicants must prove that they have properly filed and paid taxes for the past five years to renounce. In addition, if your assets are worth more than $2 million, you must pay an “exit tax.”

In conclusion, expats are renouncing their citizenship to avoid their U.S. tax obligations; however, what they must realize before making the decision is that the renunciation of the status doesn’t actually solve all the problems. It is advised that expats considering renunciation should consult with tax experts to weigh options.

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How to Avoid Receiving the IRS Penalty Notice

 

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The IRS penalty notice is never fun to receive

Each year, about 50 million penalty notices are sent out by the IRS. There are 100 million eligible taxpayers, which means, statistically speaking, one out of every two taxpayers receive a notice. The number of automated tax penalty assessments is also increasing every year, and the trend is very much true among American expat taxpayers. Statistics also show that one out of every 100 tax returns filed by ordinary American taxpayers is audited.

The United States of America is one of the very few countries to enforce citizenship-based taxation. If you are born accidentally in a US hospital with foreign parents on vacation, you would be subject to a lifetime of tax servitude. In addition, tax policies such as the FATCA and the FBAR- initially designed to catch tax evaders- are now haunting honest, hardworking Americans who have moved overseas. The IRS’ influence reaches around the globe, and it can identify and impose penalties to American expats who unknowingly “evaded” taxes for years. American expats who failed to prove their compliance with the IRS are even being rejected of the basic banking services.

Many expats who received the notice often contact the American government representatives for help. However, the overseas American embassies and consulates have rarely been proven valuable when it comes to taxation policies. Both legal and tax implications for expats are simply too complex.

So what can be done when you receive the penalty notice from the IRS stating you owe years of back taxes?

Expats could dispute the claim within 60 days, and the IRS generally is willing to listen. However, the process will likely take a substantial amount of time. If the IRS isn’t willing to forgo the penalties, one is advised to pay promptly to avoid incurring interests. If the recipient of the notice doesn’t pay the amount stated on time, the IRS would generally impose a late payment penalty of .5 percent for each month, up to a maximum of 25 percent.
What many expats don’t realize in the moment is that these systematic penalty assessments could be routinely avoided with the right guidance and help from well-equipped tax professionals. The IRS offers different programs in which the expat American taxpayers could prevent the worst tax nightmare. Do not panic at the prospect of receiving the penalty notice from the IRS, and you must resort to a legal and logical solution.

Here are your options-

1) Streamlined Filing Compliance Procedures

If a taxpayer non-willfully does not report foreign assets, he or she can submit six years of FBAR and three years of tax return under the streamlined procedure. Depending on the status, there are two streamlined procedures; one called “the streamlined procedures residing in the United States” and the other called “the streamlined procedures residing outside the United States.” For eligible U.S. taxpayers residing outside the United States, all penalties will be waived under the streamlined procedures.

Non-resident taxpayers might be better positioned than resident taxpayers to achieve their goal of a non-willful, no penalty resolution under the Streamlined Procedures. Taxpayers likely consider a Streamlined submission if they are comfortable and have sufficient factual basis to certify their “non-willful” status. If there are any uncertainties or potentially difficult factual scenarios involved, consult with experienced counsel. The purpose of seeking experienced counsel is to discover the seriousness of the situation and to be guided into the best resolution at the least overall cost.

2) The Offshore Voluntary Disclosure Program

The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. The OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.

3) Quiet Disclosure
The IRS is aware that some taxpayers have made “quiet disclosures” by filing amended returns, by filing delinquent FBARs, and paying any related tax and interest for previously unreported income from the OVDP assets without otherwise notifying the IRS. Taxpayers who have already made “quiet disclosures” are encouraged to participate in the OVDP by submitting an application, along with copies of their previously filed returns (original and amended), and all other required documents and information to the IRS’s Voluntary Disclosure Coordinator. Taxpayers are encouraged to avail themselves of the protection from criminal prosecution and the favorable penalty structure offered under the OVDP. Unlike a voluntary disclosure through the OVDP, quiet disclosures provide no protection from criminal prosecution and may lead to civil examination and the imposition of all applicable penalties

The best approach is to work with a CPA who works in close communication with a tax attorney. In some cases, the lawyer’s input can benefit immensely when the situation involves a possible settlement process or criminal procedure. Locus has both CPAs and attorneys on staff to provide the most effective tax services to expats in the potential trouble. Get in touch with us for your concerns or questions today and receive a personalized expat tax services from our experts.

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A Comprehensive Guide to All Necessary Documents for Expat Tax Filing

 

Checklist

Keep a checklist for all documents necessary for filing

In preparation for your tax return as an expat, knowing exactly what documents are needed can make the filing easier and also protect you against an IRS audit. Check out the following list of documents you will need to keep track of for the 2016 filing.

Tax Organizer Form

The Tax Organizer Form, provided by your tax preparer, collects the very basic information such as your name, address, employment situation and income as well as your dependent’s information. Unique to the expat filing, the form will also ask for foreign accounts and deductions you qualified for in the past. It is a long form, but it is an essential questionnaire to get started on the filing process.

Prior Year’s Return

If you have a copy of your last year’s tax return, the tax preparer can gain many reference points to expedite the filing process. For instance, the tax preparer can apply for the Foreign Tax Credit, which can be extended yearly, based on your previous qualifications. Also the preparer can take another look at prior year’s return and may correct any misinformation to find overlooked tax benefits!

 

Travel Calendar

To qualify for expat tax benefits such as the Foreign Earned Income Exclusion and the Foreign Housing Deduction, it is important that you keep track of your travel dates. The IRS requires exact dates to be included in the return, so an accurate travel calendar can fortify your case for well-deserved benefits.

Income Documents

There are different sources of income a taxpayer may have. Check to see if you earned income through one of the following sources.

Wages, Compensation, Salaries: Wages and salaries earned through an employment may be the most common source of income. A U.S. based employer will likely to provide a W-2 form, and you may receive an equivalent form if you work for a foreign company. If your employer does not provide you with a salary report, you must collect your monthly wage statement such as a pay stub.

Self Employed, Sole Proprietorship: For self-employed taxpayers, pre-deduction gross income and categorized expenses will be the necessary income documents.

Interest and Dividend Income: Taxpayers are also required to keep track of the bank’s interest payment and the stock dividend payment. In the United States, you’d receive the 1099-Int or 1099-Div forms which will state the interest and dividend income. The foreign banks however may provide different documents to provide such information to their clients.

Stock and Securities Transactions: Any capital gains or losses from your U.S. and foreign investments must be reported in your filing. You are likely to receive a 1099-B with detailed income and reportable transactions from your U.S. investment company. As for your foreign investments, a year-end reporting statement may not be provided. In that case, you may need to personally keep track of the investment transactions. Both interest and dividend income, even when they are not taxable in your current country of residence, need to be reported to the IRS. If you inform your foreign investment manager of your tax obligations, s/he will likely provide you with proper documents that will make the reporting process a bit easier.

Rental Income: Many U.S. expats rent out their U.S. homes during their stays overseas. The rental income and expenses from both the U.S. and abroad properties must be accounted in the filing. For the U.S. property, your management company may provide the necessary information on a 1099-Misc form.

Real Estate Sales: If you made a permanent decision to move abroad, you have likely sold your house or land. Provide your tax preparer with documents from your purchase and the sale of the real estate. Important information to include are: date of purchase, purchase cost, date of sale, total proceeds from the sale, purpose of the property (personal use, business use, etc.), and any improvements to the property.

Social Security and Pension Payments: Your U.S. Social Security payments are reported on a form SSA 1099. Other retirement income, including pension, is included on a form 1099-R. If you receive similar social security benefit from your foreign residence, keep track of all the payments through your bank statements.

Miscellaneous Income: Keep track of miscellaneous income including gambling income, royalties, unemployment support, and disability check as these all need to be reported on a return.

Deduction Documents

Now that you are familiar with all income sources that will be taxed, let’s take a look at some documents that will help you receive much appreciated tax deductions.

Interest Paid: Mortgage interest is a deductible expense. For your U.S. interest payment, receive a form 1098 to keep. For your foreign interest payments, keep bank account statements

Property Tax paid: Property taxes can be used for several deductions. Keep track of the amount of taxes on your real estate that you paid to the government.

State Income Tax and Sales Tax Paid: Perhaps the most familiar items on the list, the state income tax paid last year and sales tax paid may be deductible.

Foreign Housing Expenses: You may apply for a tax deduction for the cost of your foreign housing. Qualifying expenses include the rent, utilities, property insurance, repairs, and parking. Be sure to keep track of all those expenses for a possible tax deduction.

Dependents: Keep track of Social Security numbers or ITINs for all your dependents. Also education costs and child care costs, for children under 13, may qualify for a deduction and different tax credits

Other Deductions: There are other expenses that may be able to reduce your taxable income. Donations to charity- cash or items- may qualify. Be sure to keep track of the amount, date, and charity’s information. Also medical expenses, those not provided through your insurance plan, can lower your taxable income. Other expenses include the alimony paid, unreimbursed business expenses, and administrative fees for your investment accounts.

Foreign Bank Account

If you are an expat, you’ve certainly heard about the FATCA and the FBAR, and that you are required to report your foreign bank and investment accounts. It is best to keep the physical paper statements for six years. The online statements usually are available for only 18 months, and the IRS may request for documents from several years back during an audit. Keep track of monthly statements sent by your foreign banking service provider just to be sure.

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