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Information provided on this site is for general guidance
only and is often simplified. Actual IRS procedures
are complex, and taxpayers should obtain professional
assistance or use IRS sources for complete information.
Tax
Position Of US Citizens Overseas
Because
the US taxes its citizens on the basis of their nationality
and not on the basis of their residence, the concept
of 'offshore' is not very useful to a US national
from a residence point of view. There is an income
tax concession available during non-residence, but
beyond that the only real option for a US citizen
is to change nationality. In all other respects the
international tax situation of an individual citizen
is about the same whether they are in or out of the
US.
US expatriates
who meet the Physical Presence Test or meet the Bona
Fide Resident Test may be able to take advantage of
the Foreign Earned Income Exclusion and or the Foreign
Housing Exclusion.
You
are considered physically present in a foreign country
(or countries) if you reside in that country (or countries)
for at least 330 full days in a 12-month period. You
can live and work in any number of foreign countries,
but you must be physically present in those countries
for at least 330 full days. The qualifying period
can be any consecutive 12-month period of time. A
"full day" is 24 hours; days of arrival
and departure are generally not counted in the physical
presence test.
A
person is considered a "bona fide resident"
of a foreign country if they reside in that country
for "an uninterrupted period that includes an
entire tax year." A tax year is January 1 through
December 31. Brief trips or vacations outside the
foreign country will not jeopardize status as a bona
fide resident. If the foreign government concerned
has determined that a person is not subject to their
tax laws as a resident, the Exclusions will not be
available.
These
benefits seemed under threat in 2004, but they were
confirmed in the Tax Reconciliation Act of 2005 (passed
in 2006) albeit with restricted terms.
US citizens and resident aliens who are outside the
United States (and its possessions) have the same
requirements to file tax returns as anyone living
in the United States. Income from worldwide sources
must be considered when determining if a federal tax
return must be filed. In general, foreign earned income
is income received for services performed in a foreign
country.
If you
pay foreign taxes, it may be possible to offset these
against US taxes if there is a double tax treaty with
the country in which you are resident.
The concept of 'tax home' is used in connection with
foreign residence. Generally, a person's tax home
is the general area of her main place of business,
employment, or post of duty where she is permanently
or indefinitely engaged to work. A person is not considered
to have a tax home in a foreign country for any period
during which their abode (the place where they regularly
live) is in the United States.
The
Heroes Earnings Assistance and Relief Tax (HEART)
Act 2008
The HEART Act was directed at serving military personnel,
but contained several stings in the tail for expatriates.
One provision
requires US employers doing federal contract work
for the US government, and using foreign subsidiaries
to compensate their US employees working abroad, to
begin paying Social Security and Medicare taxes on
behalf of these employees. The provision is designed
to make sure that defense contractors in Iraq, Afghanistan
and elsewhere meet their legal obligation to pay payroll
taxes on behalf of the people who work for them.
“For
the sake of transparency and fairness in our tax system,
we cannot allow Federal contractors to set up shell
corporations in tax shelters and shirk their responsibility
to pay payroll taxes for their American employees,"
Obama commented following approval of the legislation
by the House of Representatives on 21st May.
The
other offset provision seeks to make certain that
individuals who relinquish their US citizenship or
long-term US residency pay the same Federal taxes
for appreciation of assets, such as stocks or bonds
that they would pay if they sold them as US citizens
or residents. Under this legislation individuals are
treated as if they sold all of their property for
its fair market value on the day before they expatriate
or terminate their residence.
In
May, 2012, Senators Charles Schumer and Bob Casey
introduced the Expatriation Prevention by Abolishing
Tax-Related Incentives for Offshore Tenancy’
or the ‘Ex-PATRIOT
Act’. The bill, if passed, would penalize
individuals giving up their US citizenship for the
purpose of avoiding taxation. Penalties would include
a bar on returning to the US and a 30% capital gains
tax on profit realized after enactment of the law.
While
some argue that the bill is unconstitutional, and
given the seeming inability for the Senate and the
House of Representatives to agree on virtually all
proposed legislation linked to raising taxes, the
future of the bill remains uncertain.
IRS
Guidance For Expatriates In 2009
In
2009, the IRS issued new guidance to certain individuals
who have expatriated by relinquishing their American
citizenship, or by ceasing to be treated as long-term
residents of the United States.
According
to the IRS's announcement: "An individual who
expatriated before June 17, 2008, and needs to file
an initial Form 8854, Initial and Annual Expatriation
Information Statement, may either wait until the new
Form is ready or use the 2007 Form 8854. If the 2007
Form 8854 is used, the individual should strike out
'2007' and replace it with '2008.' There is no due
date and therefore no potential penalties. However,
the individual will continue to be subject to tax
as a US citizen or resident until the Form 8854 is
filed."
"An
individual who expatriated before June 17, 2008, and
needs to file an annual Form 8854 will generally not
be required to file the form until June 15, 2009,
because he or she is overseas. The revised Form 8854
should be available before June 15. An individual
who falls into this category and has an April 15 due
date should use the 2007 Form 8854 and strike out
'2007' and replace it with '2008.' If unable to file
by April 15, the IRS will waive the USD10,000 penalty
for late filing under the reasonable cause exception."
"An
individual who expatriated after June 16, 2008, and
before January 1, 2009, is required to file Form 8854
for 2008. The Form 8854 must be filed by the due date
for the 2008 Form 1040 or 1040NR, with extensions.
In many cases, someone in this category will have
until June 15, 2009, if living and working outside
the United States on April 15. However, if the return
is due on April 15 and an individual has not requested
an extension, he or she should do so immediately.
Individuals who file Form 8854 by the due date, with
extensions, will not be subject to the USD10,000 penalty
for late filing."
In
recent years, Congress has tightened tax laws for
US citizens living and working abroad, or who have
chosen to give up their US citizenship.
The
Tax Increase Prevention and Reconciliation Act, signed
by then President George W. Bush in May 2006, increased
the amount that can be earned free from US taxes to
USD82,400 from the previous level of USD80,000. However,
income earned by expats above this threshold is now
typically subject to higher tax rates. Furthermore,
high housing costs, much of which previously could
be excluded from the computation of US tax, are now
treated as a taxable benefit and taxed often at 30%
to 35%, making many individuals worse off, or leaving
the employer to pick up the extra bill. The legislation
is retroactive to January 1, 2006.
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