1. U.S. persons must file if they have an income:
It’s hard to believe for many that have never lived or worked in the U.S but you must file a U.S. Federal Tax return each year if your worldwide income exceeds the filing threshold.
• Wages/Salary from US and non-US sources
• Rental Income
* If you are self-employed, the threshold is $400
2. Most American overseas do not end up owing U.S. taxes
Most Americans Overseas do not end up owing the U.S. any tax since they have paid taxes in their country of residence, which can be used as a credit. The U.S also has a ‘foreign earned income exclusion‘ which excludes the first $100.800 for 2015 that you earn from U.S. taxation.
3. Renouncing citizenship doesn’t avoid US taxes
You can renounce your U.S. citizenship but be aware that renunciation may have no effect whatsoever on your U.S. tax obligations. Upon renunciation you need to file form 8854 that asks you clearly to state that you have filed all your taxes for the last 5 years. If you haven’t you might be able to renounce BUT the IRS will not let you go until you have filed up a number of years back until the date of renunciation. There are cases of people renouncing and still owing tax, the worst of both worlds. In a number of cases you might have to pay an exit tax upon renouncing depending on your financial situation.
4. What if I do nothing, will the IRS come to me?
FATCA requires all foreign financial institutions (banks, insurers, investment brokers, etc) to report to the IRS information on financial accounts held by U.S. citizens and those with dual nationality or by foreign entities in which US taxpayers hold a substantial ownership interest. This means that your bank will inform the IRS of your financial assets and interests. Generally your bank will also send you a letter asking to confirm you are a U.S. person. If you confirm or don’t answer your information is passed to the IRS. If you indicate you are NOT a U,S, person and it turns out you are then severe penalties apply. It is important to know that if the IRS comes to you instead of the other way around none of the amnesty programs apply anymore.
5. Amnesty program: File for the first time without penalties
Americans overseas who fear harsh penalties may be hesitant to get caught up on delinquent returns. By participating in the IRS amnesty program, the Streamlined Filing Procedure, you can become compliant with no late filing or FBAR penalties! Simply file the last 3 years of tax returns and the last 6 years of FBARs and you will have fulfilled your tax requirements. It’s the perfect program for US persons who were unaware of their US tax filing obligations.
Disclaimer: The advice offered in this article is intended for informational purposes only. Use of this column is not intended to replace or substitute for professional advice. No action should be taken based on this information without seeking proper professional advice. This website. company, publisher and its author are not responsible nor liable for the outcome or results of following any of the above advice and/or links to advice in any given situation.