Do I Have to File a Tax Return?

Under U.S. tax law, all of the citizens and residents of US are required to file a tax return and report their worldwide income to the IRS, no matter where they live. Even if they have no tax liability, they are required to file a tax return provided their income exceeds certain minimal thresholds. The U.S. has treaties with many foreign countries that will reduce or even eliminate actual owed tax. However, you cannot take advantage of these benefits if you don’t file your tax return. The table below lists the income limit amounts for the 2013 tax year.

What forms do I need to complete for my Federal Income Tax Return?

Just as you did when living in the U.S., you need to fill out a 1040 form. You may elect to file forms 2555 and 1116 if needed. These are the forms by which you declare your foreign earned income and qualify for the Foreign Tax Credit.

If you have had $10,000 or more in a foreign bank account at any point during the year (even one day) you must file FBAR. Also, if you have signing authority over such an account, FBAR must be filed. The deadline for filing is June 30 and there are no extensions. Even if you requested an extension on yourUStax return, you must file FBAR on time. Penalties for failure to file can be steep so it is important to meet that deadline if you are required to file.

You must file Form 8938 if you have specified foreign financial assets that meet or exceed certain thresholds. Specified foreign financial assets include things such as:

• Foreign pensions
• Foreign stockholdings
• Foreign partnership interests
• Foreign financial accounts

Thresholds for those residing in U.S.:

• $50,000 — $100,000 if married filing jointly — at the end of the year
• $75,000 — $150,000 if married filing jointly — at any time in the year

Thresholds for those residing outside the U.S.:

• $200,000 — $400,000 if married filing jointly — at the end of the year

• $300,000 — $600,000 if married filing jointly — at any time during the year.

Form 8938 is filed along with yourUStax return if you aren’t required to file a tax return in any given year, You are not required to file Form 8938, regardless of the value of your specified foreign assets. If you receive an extension on your tax return, you receive an extension on Form 8938 as well.

There are two special tax provisions used byU.S.expatriates to reduce their federal income tax liability while working abroad. These provisions are:

What is the Foreign earned income exclusion? 

Many U.S. citizens and resident aliens who are working abroad are subject to tax in the foreign country in which they are working. In order to minimize the burden of double taxation, the U.S. tax system allows for foreign earned income (FEI) and housing exclusions as well as a credit or deduction for foreign taxes paid.

All U.S. citizen or residents alien of the US who establishes a tax home in a foreign country and who meets either the bona fide residence test or the physical presence test may be able to exclude all or part of their foreign-source earned income and self-employment income from the federal income tax through a provision called the foreign earned income exclusion (FEIE). The income exclusion only applies to earned income, not to investment income.

Maximum foreign earned income exclusion*

                                                                          * Adjusted annually for inflation

Can I claim Foreign Housing Exclusion or Deduction?

Foreign housing exclusion can be used to shelter your taxable amount when your foreign earned income exceeds the maximum annual earned income exclusion. Your housing amount is the total amount of your qualified housing expenses for the year minus the base housing amount. Your qualified housing expense includes rent and utility payments, the cost of home repairs, insurance premiums, fees you pay to a third party to obtain a lease, residential parking charges and occupancy taxes that aren’t deducted elsewhere on your return. TheUStax law put a limit on the expenses you can include in the calculation. The limit is generally 30% of the maximum foreign earned income exclusion, but it may vary depending upon the location in which you incur housing expenses. The base housing amount is 16% of the maximum exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year. The housing exclusion applies only to amounts considered paid for with employer-provided amounts that you report as foreign earned income and include in gross income on your Form 1040. Employer-provided amounts include your salary, housing payments that your employer pays directly or reimburses you for, allowances for education expenses and any other payment of money or property that’s reported on your return.

Self-employed will not qualify for the foreign housing exclusion. But they can take advantage of the foreign housing deduction by deducting applicable housing expenses from their gross income. While the Foreign Housing Deduction will lower your overall tax liability, it will not reduce the Self-Employment Tax liability burden.

The exclusions are elective and an individual may elect either or both exclusions. These elections are available to each individual taxpayer, so, if eligible, each spouse may claim the exclusions even if a couple files a joint tax return. You will only be able to claim these allowances by filling out and including Form 2555 with your Federal Tax Return.

How does Excluded Income Affect My Other Deductions and Credits?

Certain itemized deductions can be disallowed if a taxpayer elects to claim the foreign earned income exclusion (FEIE) and/or housing exclusion. Certain deductions related to the realization of foreign earned income, such as employee business expenses and deductible moving expenses, are not allowed to the extent they are properly allocable to excluded income. You may not claim a tax credit for taxes paid on any income which has been excluded fromUStaxation using the foreign earned income exclusion or the foreign housing exclusion.

How can I claim Foreign Tax paid?

It is noted that foreign earned income exclusion and foreign housing exclusion or deduction applies only to the earned income. If you own foreign investments—either directly via a stock or bond, or indirectly through an exchange-traded fund or mutual fund—the foreign country may withhold taxes on your investment income.U.S.tax law prevents double taxation by allowing you to claim either an itemized deduction for foreign taxes paid or accrued, or a foreign tax credit on yourU.S.income tax return. Foreign tax credit or deduction applies to both earned income and investment income. You do not have to meet the bona fide residence or physical presence tests to claim foreign tax credit or deduction.

Generally, you must choose to take either a credit or a deduction for all your qualified foreign taxes. For those who itemize deductions on Schedule A of Form 1040, taking a deduction for foreign taxes paid is the easiest way to go. However, an itemized deduction only reduces your taxable income, whereas an income tax credit can provide a dollar-for-dollar reduction of your actual tax liability. In most cases, you are probably better off taking the credit rather than claiming an itemized deduction.

There are limits to the amount of foreign tax credit you may take. The amount of foreign tax credit you’re allowed to claim is limited to the lesser of the amount of foreign tax paid or theU.S.tax liability on the same income. The limitation is computed with the following formula:
Maximum FTC   =U.S. Tax Liability × Foreign Taxable Income/Worldwide Taxable Income

If yourU.S.tax liability were the same or higher than the foreign tax paid, you would be eligible to claim the full credit. If you paid more foreign tax during the current year than you can claim as a credit, you can carry back the excess for one year (to file an amended return for the previous tax year) or forward the excess for 10 more years. The ability to carry back or carry forward any unused tax credit only applies if you file Form 1116, and is restricted by the amount of excess limit available in those carry-back or carry-forward years.

When is My Tax Return Due?

If you are aU.S.citizens and resident aliens residing overseas on the regular due date of your return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15.

If you are unable to file your return by the automatic 2-month extension date, you can request an additional extension to October 15 by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, before the automatic 2-month extension date. However, any tax due payments made after June 15 will be subject to both interest charges and failure to pay penalties. The taxpayer residing abroad may request a discretionary two-month extension from October 15 to December 15, provided he or she sends a letter to the IRS by October 15 stating the reasons why additional time to file to December 15 is needed.

For the year of the move abroad, a taxpayer needing more time than provided with the automatic extension for purposes of meeting either the bona fide residence or physical presence tests may request an extension of time to file until 30 days after the date on which the individual expects to meet either of the two tests (Form 2350).

What Penalties if I Failed to File and Pay U.S. Taxes? 

If you are delinquent on theirU.S.tax filings (whether intentional or not), you will generally be subject to aUStax penalty and interest on the taxes due. The penalties will depend on your particular situation. The relevant penalties include:

• Failure to file penalty – 5% of the taxes owed for each month outstanding.  The penalty is capped at 25% of the total tax liability.
• Failure to pay penalty -0.5% of the taxes due for each month outstanding. unpaid tax liabilities will also accrue interest. Unlike the failure to file penalty, there is no limit on the failure to pay penalty.
• Accuracy related penalty – depending on the particular facts, an additional 20% penalty may apply.
• Failure to file Form 8938 – Failure to file Form 8939 can result in a penalty of $10,000.
• FBAR penalty – Failure to report foreign bank accounts can result in a penalty of $10,000 per account if there is reasonable cause for failing to file.  In the case of willful neglect, the penalty can be as high as 50% of the balance in the account or $100,000, the greater of the two.
• Criminal penalties – failure to fileU.S.tax returns is a criminal offense.

 What is the IRS Streamline program for Delinquent Taxpayers? 

If you are aU.S.citizen or green card holder (who is treated asU.S.citizen for tax purposes) and have not been filingU.S.tax returns each year, you are considered delinquent on yourU.S.taxes.  ManyU.S.taxpayers do not realize that they have to fileU.S.tax returns even they have not lived in US. To address the fact that manyU.S.taxpayer living abroad have failed to timely file their tax returns, the IRS launched a new streamlined program for delinquentUSexpatriates.

Any individual who did not file one or more of the most recent three years and was physically outside the United States for at least 330 full days

The procedures are as follows:

• Taxpayers will be required to file all back taxes and relevant documentation for the previous 3 years and FBAR reports for 6 years.
• Under the New Procedure, the taxpayer must certify that the failure to report all income, pay all tax, and submit all required information returns (including the FBAR) was due to “non-willful conduct”, and must meet a “non-residency” requirement.
• Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Eligible individuals who comply with all of the instructions will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.