In Part One of my ‘Tax Filing for US Expats & the IRS’ I looked at the landscape that US expats face when it comes to filing their annual tax return. The long and short of this article; US citizens and green card holders are subject to worldwide taxation and must file their income tax return annually. In Part Two I want to focus more on the information you need to file your own tax returns.
I am often asked in meetings whether I can refer my clients to an accountant. The answer to this question is of course, yes. We have an extensive network of tax professionals that are able to assist our clients. However, there is a cost attached to using an accountant and for many people I believe this can be avoided.
What Forms Do I Need To Complete?
The majority of people that I meet have very simple tax filing requirements and can complete their own taxes by understanding a few basic forms:
The 1040 is the form where you state all of your various incomes, deductions and credits. This form will ultimately determine that amount of tax you are due to pay, or be refunded.
The 2555 and 2555EZ
If you pass either the Bona Fide Residence Test or Physical Presence Test then you will qualify for the Foreign Earned Income Exclusion and will need to state your income on the 2555 or 2555EZ. Generally speaking most people can fill in the simpler version of this form; the aptly named 2555EZ.
If you have self-employment income, want to claim the housing exclusion or deduction, or have business and moving expenses, then you will likely need to use the full 2555 form. If you are doing this I would advise you seek help from a tax professional.
The Report of Foreign Bank and Financial Accounts (FBAR) is the form I find many people miss during their filing. Importantly, this is a US Treasury form not an IRS form, which is why it is often missed. You are required file the FBAR when the aggregate value of all foreign financial accounts exceeded USD 10,000 at any time during the calendar year.
If you are a US expatriate with income below the Foreign Earned Income Exemption (USD 100,800 in 2015) and no foreign assets, these three forms will likely be all that you need to file. The 1040 and 2555EZ are two pages each and the FBAR can now be filed online. People with this simple situation could save themselves anywhere USD 200-700 per year by taking a few hours to complete these forms.
How Do I File?
The IRS provide a FreeFile service for people who wish to file their own taxes. When you enter the FreeFile system you will have the two choices. First, will be to use a third party system provided by companies like Turbo Tax, TaxAct or H&R Block. This is limited to people who earn less than USD 60,000 and when choosing a provider it is very important to select one that allows foreign addresses.
The second option is to use the IRS’ online fillable forms. When selecting this option it is important to select the full 1040 option, not the 1040EZ or 1040A. The system will then allow you to add additional forms like the 2555EZ, which can also be completed online.
You may have additional forms to complete in order to report other type of income, or claim certain credits. The vast majority of these forms are also accessible through either of the FreeFile systems and depending on your situation could also be very simple to complete.
What Else Should I Know?
In Part One of this series we also talked about the Foreign Account Tax Compliance Act (FATCA). This sweeping legislation has also introduced new filing requirements for those with foreign financial assets.
As part of the new FATCA regulations that I detailed in Part One of this series, you may now have to complete the 8938. On it you report your interest in foreign financial assets such as bank accounts, investments, life insurance and business ownership. It is similar to the FBAR but goes to the IRS.
You are required to file this form if the aggregate value of your foreign assets exceeds the threshold of USD 200,000 at the end of the tax year, or USD 300,000 at anytime during the tax year. If you file jointly, these thresholds are USD 400,000 and USD 600,000 respectively. It is also important to note that these limits drop to USD 50,000 and USD 75,000 if you return the US.
The 8938 can be quite complex to fill out and I would definitely recommend that you seek help from a tax professional if you are required to file it.
Filing Jointly or Separately
If you are married then you can choose to file your taxes separately or jointly. Filing jointly can often be beneficial as it increases some of your allowable deductions and tax rates. However, I often meet people who are married to non-US spouses, and am asked what they should you do?
Firstly, if the foreign spouse is not a US taxpayer and has no US assets, they are not required to file an annual tax return. There can be benefits to filing jointly, which ultimately come down to what you want to happen to your assets over the long-term. But this is very subjective and different for every person.
There are two basic things I think you should be aware of when making this decision:
- If you file jointly then all of the assets in the foreign spouses name are now reportable annually to the IRS, where they will not have been before.
- The foreign spouse will need to acquire an Individual Taxpayer Identification Number (ITIN) from the IRS in order to file.
Asking For Help
If you have any doubts about the forms you need to complete, or how to complete them, the advice is simple; speak to a tax professional. It is better to get your return correct than filing it incorrectly and risking additional costs or penalties down the road.
When choosing a tax professional it is vitally important to choose someone who understands the cross-border issues faced by US expatriates. I come across people all the time who are receiving very poor advice simply because their accountant is ignorant to the rules surrounding expatriates.
In the third and final part of this series, I will be taking a look at the various financial planning instruments that US taxpayers can use to manage their tax more efficiently.
Please note that beijingkids does not necessarily endorse the views presented in this article.
About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email firstname.lastname@example.org.