FAQ
• A. While you do not qualify for the combat zone military pay exclusion, as this exclusion only applies to members of the US Armed Forces, you do qualify for an extension for the filing and paying of your income taxes. This extension gives you 180 days after your last day in the combat zone. During this period, no interest or penalties attributable to the extension period will be assessed. I have not filed in 25 years...Will I go to jail? • If you are proactive, file your income taxes now and pay any related penalties and interest you will not go to jail. Remember, You only have to file for those years where your earned income is more than $8,950 ($400 if you are self employed). You will also have to file under other less common situations, For a full list please visit: http://ftp.irs.gov/individuals/article/0,,id=96623,00.html or e-mail us with your specific question. But I would have no taxes due because of the foreign earned income exclusion, are you sure I have to file? • Yes, you must file even if your tax due is Zero. I am self employed, does I qualify for the foreign earned income exclusion? • Yes, for federal income taxes - but you are responsible for medicare and social security taxes (And entitled to such benefits upon required age). I own my own business overseas, which is a legal entity in my country of residence. Do I qualify for the foreign earned income exclusion, and do I have to pay social security and medicare taxes? • You qualify for the exclusion from the 3 taxes. However, you must file an informational tax return for any foreign companies you own (Form 5471). Form 5471 is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. I am a foreign service government employee, do I have to pay state taxes while living overseas? • Depending on your state of residence, you may or may not. Unfortunately the list is extensive - but if you e-mail us we would be happy to check. Due to a medical emergency, I had to come to the US and because of this time I do not meet the 30 days for the physical presence test. is there an exception under medical emergencies? • No. The only exception for the 330 day requirement in the physical presence test is when you must leave the foreign country due to war or civil unrest. Am I taxed on the market value of the residence that my employer provides for me while overseas? • Unless living in those quarters is mandated by your employer for business reasons, it is indeed taxable income (Though it could be part of your foreign earned income exclusion). I have to pay US taxes, but I do not have US Dollars and my home country currency is not fully convertible. How can I comply with my duty to pay taxes? • If you face the issue of blocked income due to foreign currency restrictions in your home country, you could postpone the reporting and payment until the currency becomes unblocked, or pay with funds you may have in the US. If you decide to postpone. you would file certain information and no penalties or interest would accrue. I am a US Citizen and have not lived in the US since 2000. I maintain a residence visa in a foreign country and live there when I am not working. When I am working I work on a Cruise Ship; the ship is not registered in the USA. Do I qualify for the Foreign Earned Income Exclusion? • Yes. I have not filed in more than 1 year. Do I lose my right to the foreign earned income exclusion? • No! I inherited some money, does the foreign earned income exclusion apply? • No. The exclusion only applies to earned income (i.e. wages). I have many trips in the last 2 years that make it difficult to meet 330 straight days of physical presence. What can I do? • Your dates can overlap in order to meet the physical presence test. I was only a couple of days short of meeting the 330 days for the physical presence test! What luck! Is there anything I can do to avoid this large tax bill? • A. We can file an extension on your behalf, and wait to file until you have met the 330 day requirement (Yes, even if you are "using" days from the next fiscal year). It get's a little complicated, so we would be happy to help you. What is one of the most popular mistakes by taxpayers living abroad? • A. Not reporting your bank accounts abroad. This applies to any person that has a financial interest in, signature authority or other authority over any financial account (s) in a foreign country and the aggregate value of these account(s) exceeds $10,000 at any time during the calendar year. Not reporting can make you subject to civil and criminal penalties, and penalties of up to $100,000. I am a non resident alien, and hold some investments in the US through a US brokerage house. I've had some tax withheld, can you explain what taxes I am subject to? • There are several elements that will determine taxation. 3 key elements: - The concept of Dividends, - the concept of Capital gains - 183 day presence test (Which is unfortunately not as straight forward as simply 183 days in your last year). Generally speaking: - Selling securities will not result in tax on your capital gains, as long as you are trading on your behalf and for your personal gain. - Dividends and interest income are considered periodic income and are subject to a 30% flat rate tax. Net capital gains that are not effectively connected with the conduct of a US Trade or Business, and are not periodic nor fixed, and gains from the sale of real estate are completely exempt from taxation (Code Section 871(a)(2) and 881(a). In order to determine whether there is US trade or business (and hence taxation), the asset use test and business activities test must be analyzed for each particular situation. For the most part, individuals trading through brokerage houses are not considered to be engaging in US trade or business. There are exceptions, and treaties between the foreign country and the USA can also impact the above general rules (They can reduce the 30% flat rate tax). I am a US citizen and I have been working in Mexico for more than 5 years as a chemical engineer. I wasn’t planning on staying this long in a foreign country but I’ve gotten married here and I plan to live here for many more years. Since I’m not in the US, doesn’t that make paying federal taxes voluntary? • You are not exempt from paying taxes. You are taxed on the basis of your citizenship and not your residency. Americans are taxed differently from citizens in most countries. However, there are special exemptions that you may look into. There are credits for taxes that you pay to the country where you reside as well as an $87,600 foreign earned income exclusion. Take note that this exclusion is adjusted for inflation annually and is estimated to be $91,400 in 2010. In addition, there is no statute of limitations on tax collections if you have never filed your income tax return. Obligations grow each year that they’re not paid. To report income, you have to first file the right IRS form – the Form 2555 (Foreign Earned Income Form) or Form 2555-EZ, in addition to the IRS Form 1040. Form 2555 is for those who own houses and/or are self-employed. Form 2555-EZ is for those whose income is less than $85,700 and will not be applying for housing and self-employment deductions. There still is an April 15th deadline but the IRS allows an automatic two-month extension to file the forms. However, be advised that penalties and interest charges will accrue. Started my job in New Zealand as an interior designer in July 2008 and went back to Miami in December 2008 to sell my car and my house there. It took me awhile and I resumed my job in Auckland in July 2009. Am I entitled to the foreign earned income exclusion? • Since you’ve been going back and forth, the length of time that you’ve been spent in a foreign country does not amount to a year. To meet the bona fide resident test for a foreign country, you must have lived there for an uninterrupted period that includes an entire tax year; that is from January 1 through December 31. You must also make this country as your tax home. You fail to meet this test. Your purpose in the country is to work there and not to live there permanently. You don’t want to run the risk of being audited and then losing the exclusion. To pass the physical presence test, you have to be in a foreign country for at least 330 days in a 365-day period and have your tax home in that country. You would then be entitled to the foreign earned income exclusion of $87,600. However, since you haven’t been in a foreign country for that period, the exclusion would be prorated. When you prepare your 2009 tax return, you can use a different period for the test, if you prefer. You can also file for an extension to pass the physical presence test to be able to meet the requirement and then get the full exclusion. According to Section 911(d)(1) of the US Code, a “qualified individual” is an individual whose tax home is in a foreign country and who is (A) a citizen of the United States and establishes to the satisfaction of the Secretary of the Treasury that the individual has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year, or (B) a citizen or resident of the United States who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days. I had been a marketing executive based in Yemen since January 2008. The Shiite-Sunni clashes have been terrible for business. I came back to New York on May 2, 2008. There is no indication that hostilities will stop in the near future. Does the US government recognize the difficulties that expats in war-torn countries are experiencing? • The US government does indeed take into account the fact that civil unrest can interrupt your bona fide or physical presence test eligibility. Accordingly, we can file with your tax return a waiver of time requirements. You can claim the tax benefits on foreign earned income exclusion (IRS Form 2555) but only for the number of days you were a bona fide resident of, or physically present in, the foreign country. If you can claim either of the exclusions or the housing deduction because of the waiver of time requirements, we can attach a statement to your return explaining that you expected to meet the applicable time requirement, but was unable to do so due to the conditions in the foreign country. For 2008, the Secretary of the Treasury, in consultation with the Secretary of State, has determined that war, civil unrest, or similar adverse conditions precluded the normal conduct of business in Yemen starting after April 7, 2008. According to Rev. Proc. 2009-22, Section 2.05, a person who left one of these troubled countries on its list on or after the specified departure date “will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of, such foreign country, if the individual establishes a reasonable expectation of meeting the requirements of § 911(d) but for those conditions.” What is this tax form called the Foreign Bank Account Report? When do I submit the form? I’m new to Brazil and I intend to live here for at least the next 3 years. As early as now, I want to make sure that I comply with all tax regulations in the US and Brazil. • You are required to fill out the Foreign Bank Account Report (Form TD F 90-22.1) to disclose accounts you hold in foreign banks and other financial institutions if your total balance of all accounts is $10,000 or greater at any point during the year. The form has to be submitted with the US Treasury Department by June 30, 2009. You will have to provide information on all your financial accounts held in a foreign country including bank accounts (checking and savings), investment accounts, mutual funds, retirement accounts, and securities and other brokerage accounts. The instructions for filling out Form TD F 90-22.1, state that every US citizen or resident alien, partnership, corporation, estate, or trust must file TD F 90-22.1 if they have "financial interest in or signature authority, or other authority over any financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year." It’s very important that your report must be received by the due date (June 30). Electronic filing is not allowed and forms have to be mailed to a specified Detroit address rather than your IRS service center. Penalties will be assessed for failing to file this report and as they’re quite harsh, we recommend that you make the effort even if you missed the filing deadline. For any person found to be “willfully violating” the requirements to file, there is a penalty of up to $250,000 and/or up to 5 years in prison (31 CFR 5322a penalty). If the non-filing is related to a pattern of any illegal activity involving more than $100,000 in a 12-month period, the penalty is up to $500,000 and/or up to 10 years in prison for any person (31 CFR 5322b penalty). For providing false, misleading, fictitious, or fraudulent statements on the form, the person can face a fine or up to 5 years in prison or up to 8 years in prison if the false information involves domestic or foreign terrorism (18 CFR 1001 penalty). There are exceptions to this rule. You do not need to report accounts held at US military banking facilities or if your banks are located in Guam, Puerto Rico, and the US Virgin Islands. There’s also no need to report US-based accounts held by a branch or division of a foreign bank. I’m a New Yorker by heart but I love the life in South Africa. I have a small business here selling digital accessories and have never been remiss in paying taxes to the US. Call it ignorance if you want, but the first time I’ve heard of the Foreign Bank Account Report was last month. I heard that tough action is being threatened against those who don’t file the form. What do I do now? • I’m assuming that you reported and paid tax on all of your taxable income for the previous years. If you don’t have sufficient time to get the information required for filing the FBAR on or before June 30, 2009, you should file the delinquent FBAR report as soon as possible. Attach a statement to explain why the report was filed late. Send a copy of this delinquent FBAR, along with a copy of the 2008 tax return, by Sept. 23, 2009, to the Philadelphia Offshore Identification Unit. Provided all your taxable income was reported, you will not be imposed a penalty for your failure to file on time. On June 24, 2009, the IRS offered the following advice: Taxpayers who reported and paid tax on all their 2008 taxable income, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late. Send it to the address below: U.S. Department of the TreasuryAdditionally, send a copy of the delinquent FBAR, together with a copy of the 2008 tax return, by September 23, 2009, to the Philadelphia Offshore Identification Unit, at the following address: Internal Revenue ServiceIn this situation, the IRS will not impose a penalty for the failure to file the FBAR. Additionally, if all 2008 taxable income with respect to a foreign financial account is timely reported and a United States person only recently learned they have a 2008 FBAR obligation and there is insufficient time to gather the necessary information to complete the FBAR, the United States person may follow the procedures set forth above and no penalty will be imposed. For 2008 tax returns due after September 23, 2009, the tax return does not need to accompany the 2008 FBAR. I’m an expat living in Paris. This is the first year that I will be required to pay taxes as a US citizen living in a foreign country. My employer has been generous enough to pay many of my expenses here, including the rent, utilities, education of my 2 kids, as well as insurance and taxes associated with my living here. Can I use these for exemptions? What’s the maximum limit? • What you’re referring to is the Foreign Earned Income Exclusion. The amount of salary that you can exclude per year is limited to your actual wages or $87,600 (in 2009, the exclusion for 2010 is $91,400 and it is adjusted every year)-- whichever is less. However, if you don’t meet the time requirements to qualify for a maximum exclusion, you can claim for a prorated exclusion. Please see the information related to the requirements to be eligible for the foreign earned income exclusion here: Foreign Earned Income. The following expenses qualify for the exclusion: rent, Fair rental value of housing provided by your employer, repairs, utilities other than telephone, real property and personal property insurance (homeowners & renters insurance), occupancy taxes, nonrefundable security deposits or lease payments, furniture rental, residential parking fees, tax equalization payments paid by your employer, education expenses for your dependent children. Non-qualifying expenses include lavish expenses, deductible interest and taxes, cost of buying property, domestic labor, pay television, home improvements, purchased furniture, and depreciation of property or improvements. I have a colleague who made a voluntary disclosure of his tax obligations. He was asked to pay a 20% offshore penalty. I’m against payment of this penalty; I think that it’s uncalled for. What can I do? • The 20% penalty is far less than the penalty if you do not follow the amnesty program, and is not negotiable for the most part. However, according to the New Foreign Bank Account Report (FBAR) FAQs issued by the IRS on June 25, 2009, “If any part of the penalty structure is unacceptable to a taxpayer, that case will follow the standard audit process. All relevant years and issues will be subject to a complete examination. At the conclusion of the examination, all applicable penalties (including information return and FBAR penalties) will be imposed.” The IRS added that these penalties may be greater than the 20% penalty initially calculated. You do not have any options if you want to get up to date with your responsibilities as a US taxpayer. In Chile where I’ve held a job as a chef for 3 years now, I have been religiously paying taxes. This year, I made some bad investments and so I’ll be late in filing the tax return. Which penalties incur interest? From what date does the interest accrue? • If you’re referring to accuracy-related or delinquency penalties, interest is assessed from the due date of the tax return. For all other penalties, interest is computed from the date of assessment of the penalty. The failure-to-file penalty assesses a 5% charge on the amount due from the year’s income, up to a maximum amount of 25%. The failure-to-pay penalty equals one-half of 1% of the amount owed per month, maxing out at 25% as well. You will be charged interest on an unpaid balance at the prevailing rate. You may also have to pay a penalty for not paying sufficient estimated taxes. Keep in mind that the penalty for not filing at all is higher than the penalty for not paying on time and that by paying a partial amount, you can limit the penalty and interest charges. I’ve asked several of my peers but their advice vary from not being liable for anything to being criminally liable and having the threat of imprisonment on my neck. I’ve always been wary of government proceedings and I’ve been putting off going to the IRS and coming in under voluntary disclosure. Can you tell me: what’s the worst that could happen? Will I be facing criminal charges on top of the civil liabilities I know I’m sure to be slapped with? If I do decide not to come forward, what price do I pay? • Don’t wait for the IRS to find you. When they do, they could file criminal charges related to tax evasion (26 U.S.C. Sec. 7201), filing a false return (26 U.S.C. 7206(1)) or failure to file an income tax return (26 U.S.C. 7203). You would also be facing criminal charges if you failed to file an FBAR or if you filed a false FBAR under 31 U.S.C. 5322. If convicted of tax evasion, you could get a prison term of up to 5 years and a fine of up to $250,000. Filing a false return gives a slightly lighter sentence of up to 3 years and a fine of up to $250,000. Failing to file a tax return gives a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR gives the harshest punishment, with a prison term of up to 10 years and penalties of up to $500,000. "Civil and criminal penalties, including in certain circumstances a fine of not more than $500,000 and imprisonment of not more than five years, are provided for failure to file a report, supply information, and for filing a false or fraudulent report." (From the Privacy Act Notice on Form 90-22.1) I already pay taxes in the Philippines where I’ve been staying for the past 4 years. What can you tell me about foreign tax credit? • You can claim a credit for taxes that you’ve paid in a foreign country. Not included in this computation are the taxes paid on any income, which has been excluded from US taxation using the foreign earned income exclusion or the foreign housing exclusion. A tax credit is more valuable than a deduction since a tax credit reduces your liability on a dollar-for-dollar basis. Get your total foreign-source income and divide it by your total worldwide income. This resulting percentage, when multiplied with your US tax liability, must not exceed your foreign tax credit. If your foreign tax credit is higher than your limit, you may be able to carry the excess credit over to the next year or you may even apply it to one of the previous two years. Taxes paid to foreign countries are deductible in the same manner a US state and local taxes on Schedule A (Form 1040). Alternatively, taxpayers can choose to claim foreign income tax as a credit by filling Form 1116 annually. Mostly, foreign tax credit saves more income tax than a deduction. Not all types of taxes qualify for the foreign tax credit. The IRS says that four qualifications have to be met. The tax should be imposed on you (and not the employer); the tax must be owed or already paid by you; the tax has to be legal; and the tax is based on income that you earned. If you still have questions, please contact us and we will gladly answer them. |
