Weekly Q&A #4

Cynthia: US expat living in the Netherlands. Currently, DH is on an expat assignment here under the 30% and gets paid in the US in a US bank account as we pay US taxes on that. I’m employed on a Dutch contract and pay Dutch taxes (since they are higher than what I would pay in the US, I don’t have to pay any additional US taxes). We file jointly.

I’m looking at getting a job with a US based company where I would work 100% remote from here in NL but get paid into a US bank account. We would both continue to reside here. What would be the tax implications/is this legal?


Locus Tax: Since you are a U.S. citizen who will be working for a U.S. based company and will receive payments into your U.S. bank account, we assume that you are going to receive a W-2 from the new employer. And being a citizen of the U.S. means that you are required to file a tax return regardless of where the income is earned. However, where you performed service also matters. You’d have to report all your income to the Dutch authorities. But through Foreign Earned Income Exclusion and Foreign Tax Credit, you should be able to exclude all your income for U.S. income tax purposes. In this case, you’d have to file U.S. income tax returns but no taxes.

Leo: Hi, Thanks for doing this! I live in London permanently as of last year. For 2014 US taxes I visited the US Embassy for tax advice, which they don’t do anymore. I asked what I should do for next year and the man indicated I only have to file a 2555-EZ form. I can fill that out confidently but it sounds a bit too simple. Am I missing something? Edit: I think I have to do a 1040 also. And an FBAR?

Locus Tax: Hey there! Expat taxes can be confusing the first time. Without knowing too much about your situation, here is what I’d tell you.

If you are a U.S. citizen or a U.S. resident alien living in a foreign country, you are subject to the same U.S. income tax laws that apply to citizens and resident aliens living in the United States. You will need to file form 2555 EZ with your 1040.

If you had the total value of all foreign financial accounts exceeded $10,000 at any time during 2015, you will have to file FBAR as well.

Those are just the very basics of tax filing. Let me know if you need more in-depth consultation!

Bryan: I learned about FBAR literally two hours ago. I have been living in Canada for the past five years, for most of that time with less than 10k since I was a student. However, I did do an internship and have had at least 10k across all accounts for some time. I have been filing taxes both in Canada and the US, and I never read anywhere that FBAR was needed. No government agency has ever contacted me about this.

Here are my questions:

How bad is this, am I in danger of losing my money at a moment’s notice?

Do I need to file FBAR every year?

Will I be penalized for not doing FBAR filings previously, and if so, where can I find information on such penalty?

Is the 10k limit in USD?

Please tell me everything you know about FBAR. I am kind of scared.

Locus Tax: Hey there! Take a deep breath! From what I gathered, you are not in danger to lose your money at this moment. The IRS intends a taxpayer to voluntarily report the FBAR to the US government.

The FBAR reporting obligation is satisfied by answering a question on a tax return Form 1040 such as Schedule B. Since you filed the US Tax return, you can find the information on Schedule B.

Do I need to file FBAR every year?

Yes, you do need to file the FBAR every year when the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. For this year, the FBAR due date is on June 30th. You can file for the delinquent FBARs till then.

Tip: Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System. Note that the FBAR is not filed with a federal tax return.

Will I be penalized for not doing the FBAR filings previously, and if so, where can I find information on such penalty?

Those who failed to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation that are not due to reasonable cause. Since your case is a non-willful violation, you may be able to waive the penalty by submitting for a reasonable cause.

Is the 10k limit in USD?

Yes, the limit is 10K in USD. The amount will be converted using the average of the exchange rate during the filing year.

Let me know if you have more questions.

Dan: Well, my case is a little complex (for me, anyway)! I’m about to move from Canada to the USA, allowed to work in the USA (green card) but will keep on working for my Canadian employer and travel in Canada to see clients.

What do I need to do to ensure that I’m protected? Example: I know I need to file Canadian Taxes and US Taxes. I also know that Kentucky (where i’ll be living) does not have any foreign tax credits thingy so I’ll be taxed fully. How do I go about this? I’ll be doing about 70% of my work (phone calls) in the US and 30% (meetings) in Canada…

Would it be better that I be self-employed and simply send my Canadian employer (who would then be a client only) my bills and they pay me? If so, how would that work?

I don’t know if this applies to your AMA or now if it doesn’t. Sorry about that (I’m a Canadian ‘a, I need to say sorry at least once!)

Locus Tax: Hey there!

First- Yes, you need to change your status to Married Filing Jointly or Married Filing Separately

Second: Where a US citizen employee participates in a foreign pension plan, it is likely that the plan will not have met the US qualification rules. Thus, the employee will be subject to US tax on the contributions to the plan and the growth in the plan. For employees that live in a jurisdiction that imposes an income tax at rates higher than the US rate, it is likely that the employee will have generated a pool of “excess foreign tax credits”. These credits may be used to offset the US tax on foreign sourced income and therefore may be used to reduce (or eliminate) the US tax that may currently arise on the deferred compensation.

If the employee has “excess foreign tax credits”, (and provided the deferred compensation is “foreign sourced income”), the current US tax on such income may be partially or fully offset. Another possibility is for the US taxpayer to make a claim under an applicable treaty (if the country of employment has a Tax Treaty with the US).. If there is a treaty with proper pension provisions, and the contributions to the plan have not exceeded the US plan limitations, the contributions to the plan and the growth in the plan should not be subject to current US income tax. If there is no treaty with the country the expat is living in, then there is no deferral of pension contributions by a foreign employer. The normal US income tax rules may be altered by applicable treaty provisions; for example, the United States and the United Kingdom Income Tax Treaty. While the treaty does not specifically provide that each country’s qualified plans will be treated as qualified plans by the other country, the treaty effectively provides for such a result with tax deferrals and tax reductions, but subject to certain limits.

In the context of a US citizen employed in the UK and participating in a pension plan established by the UK employer, the rules are that the employee may deduct (or exclude) contributions made by or on behalf of the individual to the plan; and benefits accrued under the plan are not taxable income. The Treaty further provides that the deduction (or exclusion) rule only applies to the extent the contributions or benefits qualify for tax relief in the UK and that such relief may not exceed the reliefs that would be allowed in the US under its domestic rules.

Hope it helps!