6.3 million Americans live abroad, the highest number on record, as confirmed by the State Department. And, unlike some nationalities expat Americans should file for tax.It’s the time of year that most of us have already let our New Year’s resolutions slip. And while we can avoid going to the gym or put off quitting smoking until maybe 2013, there is one perennial reality that none of us can avoid – taxes.
For any nationality, taxes can be as complicated as they are detested. But for American expats, the situation is particularly tricky. While most expats don’t have to worry about filing taxes back home if their income is made in another country, Americans face no such break from the taxman. A chat with George Donnelly, a California CPA who made the move to France about two years ago and runs his own business, helped me clarify some of the finer points of what the IRS demands from those of us living abroad.
So who needs to file?
The filing thresholds are so low that unless you are a kept man or woman (not impossible in these parts) almost every American or American resident expat needs to file. However, the foreign income exclusions are fairly generous. George explains, “ If you are a US citizen or resident alien and you live abroad, you are taxed on your world- wide income. You may qualify, though, to exclude an amount of your foreign earnings that is adjusted for inflation. For 2011, that amount is $92,900. In addition, you can exclude or deduct certain foreign housing amounts.”
While living stateside, filing my taxes was as simple as matching up my 1040 form with what TurboTax told me to fill in. As an expat, those simple carefree tax days disappeared the minute I got my Titre de séjour. George states that basically three things make filing as an American expat so com- plicated. “There’s the foreign income exclusion, the foreign tax credit as well as the fact that if you have more than $10,000 in a foreign bank account at any time during the calendar year, then that account needs to be reported.” The latter requires filing what’s known as an FBAR, which is the Treasury Form 90-22.1. Fortunately, I’ll never know what a 90-22.1 looks like.
Specified foreign assets and cash gifts
As everybody’s well aware, over the past few years the US government has found unreported bank accounts at UBS Bank in Switzerland. This led to the 2010 Foreign Account Tax Compliance Act (FATCA). “In December 2011, the IRS issued Form 8938, Statement of Specified Foreign Assets, which taxpayers will file to report foreign accounts, provided they meet certain requirements. For example, a married couple residing abroad and filing a joint return do not need to file Form 8938 unless the value of their specified foreign assets exceeds $400,000 on the last day of the tax year or exceeds $600,000 at any time during the year.”
In reality, FATCA may make it difficult for US expats to even have French bank accounts. “The problem is that smaller foreign banks, which do not have any US holdings, may not wish to comply with the reporting requirements of FATCA so they may just decide they are not going to have accounts with any Americans,” says Cathy Schultz, Vice President for tax policy at the National Foreign Trade Council in Washington.
For those of you who received a generous cash gift at Christmas, the annual $13,000 gift exclusion remains unchanged and if you inherit a little something during 2012, the estate and gift lifetime exclusion rises $120,000 to $5.12 million. For some that may be 120,000 reasons to keep in touch with loved ones back home.
Offshore Voluntary Disclosure Initiative: it’s back
In attempt to recoup additional revenue, this year the IRS has reinstituted an offshore disclosure pro- gram known as the Offshore Voluntary Disclosure Initiative (OVDI). This is the third time that the IRS has introduced such a program. According to George, “There is no expiration date on this pro- gram, though that can be set at any time by the IRS.” For those with a guilty tax conscience you can file or amend the FBARs and tax returns for the last eight years. The incentive being reduced penalties should the IRS come after you.
The known countries involved in the US government’s investigation include Switzerland, Liechtenstein, India, Singapore, Hong Kong and Israel. However, just because France isn’t on that list, expats here shouldn’t assume they aren’t at risk. Failure to pay your taxes or report financial accounts could result in criminal prosecution as well as fines that may exceed the value of your French accounts.
“Currently there is a reduced penalty of 27.5% assessed on the highest aggregate balance of unreported accounts,” confirms George. “Additionally, if you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify. The IRS wants to see you making a good faith effort to pay your taxes.” To back up this claim, the IRS announced the Fresh Start Initiative in 2011 to help those struggling to pay taxes.
Pay now or pay for it later
For those of you thinking about cutting tax corners and simply not paying, George reminds us, “It is our civic duty to file tax returns when needed. Also, the foreign earned income exclusion can only be claimed when a tax return is filed. The IRS will not grant this exclusion under an audit.”
The budget for the IRS has been cut $305 million this year, so you might have longer wait times if you call them. In any case, if you think you can dodge the taxman because of these measures, George informed me that the cuts would probably not dampen collection or enforcement efforts.
Should you find all the above too confusing to deal with and are truly settled in France, there is always the option of renouncing your citizenship. In fact, US renunciations were up in 2011 but whether due to politics or income, only those individuals and their lawyers know for sure. If you are considering renunciation, George can help you determine the tax impact of such an important decision.
Other than patriotic reasons, there may be practical ones for holding on to your citizenship even though you’re being taxed excessively. For one, you may need a visa just to visit “home”.
Single under 65: $9,500 over 65: $10,950
Head of household under 65: $12,200 over 65: $13,650
Married filing separately any age: $3,700
Married filing jointly under 65 (both): $19,000 over 65 (both): $21,300 65+ (one spouse) $20,150
Qualifying widow(er) with dependent child under 65: $15,300
over 65: $16,450