Contrary to popular belief, the U.S. tax filing obligation does not end when you move to a new country. The IRS taxes all Americans on their worldwide income, meaning your income in euros, yens, pounds, pesos, or whatever the currency your paycheck comes as all have to be reported on a tax return. Would there be an exception though? Kind of.
One of the very few legal ways you, as an American, wouldn’t file U.S. taxes is when your income does not surpass the certain tax threshold. American individuals who make a very moderate income would fall under the category. Generally, university and graduate school students with a small side income from their TA or RA position would assume this benefit. Take a look at the chart below as a guideline.
So, When Are You Required to File?
If you are single and earned a combined income of less than $9,525 in 2018, your taxable income would be reduced to zero, lifting your federal or state tax obligation. In the States, still, a certain amount of income may be automatically withheld, but the entire amount would be refunded after filing a tax return. As an expat, without any withheld income to claim, there seems to be no apparent reason to file for a return.
But what if, what if there are benefits to consider for filing taxes even when you don’t have to? Bear with me here, and just take a look at these reasons to file. Would the positive outweigh the negative? Additionally, it is important to recognize that individuals considering “not filing” as an option would make for a very easy tax filing case. If something that could be done in less than an hour could provide so many benefits, the task, all of a sudden, looks less daunting.
Benefit #1. Don’t miss out on refund opportunities
Of course, if you had any withheld income, file your return and reclaim your earned money; however, even without the withheld income, you might be eligible for a paycheck from the government just by filing a tax return. Refundable earned-income tax credit or child tax credit are good examples of tax credits you can apply for if your earned income does not exceed certain threshold and / or you have dependent children. Yes, it is kind of a government subsidy to low income Americans, but again, you will be eligible only if you file the returns. A tax credit means more money in your pocket, but no tax return means no credit.
Benefit #2. Lower the risk in case of an audit
The statute of limitations period for a tax audit is three years. That is if you file a return. Without filing a tax return, the statute of limitations becomes not so limited- in fact, there is no limitation without filing a return.
Here is an example – if you filed a 2018 return with mistakes, and the IRS discovers those mistakes after three years, say in 2021, they can generally no longer come after you for the 2018 return. If you don’t file a 2018 return, and, for any reason the IRS wants to dig up your past, they have the legal ground to open a case against your 2018 personal tax situation at any point in the future, forever. All that potential risk for not filing a simple tax return seems to be an easy problem to solve.
Benefit #3. Capital loss? At least take what you can from it
If you had investment losses, the amount of losses can offset otherwise taxable capital gains next years. However, you must file a 2015 return to earn the credit from a tax-saving capital loss that will carry over to 2016 and later years.
Benefit #4. Business owner and suffered a loss?
Similar to Benefit #3, the net operating loss (NOL) for 2015 from the business operations could be used to claim a refund- if you have suffered from multiple years of losses, you would be able to claim as far back as 2013 tax year and carry over the losses to offset future years taxable income. How to find out if you are eligible? Well you have to first file for taxes.
Benefit #5. Last but not the least, life is made easier with proper documents
Perhaps having a copy of your 2015 tax return wouldn’t make your daily lives easier, but occasions such as applying for a loan, submitting government-sponsored program paperwork, or getting divorced all require a copy of your tax return. Would you want to delay the process in any of those mentioned situations because you haven’t filed a simple tax return?