Tax Obligations for U.S. Citizens Overseas

By 14 November 2022News

U.S. Citizens Overseas are often unaware of their US tax obligation. More information about US citizens overseas tax on Americans OverseasUnawareness of your U.S. Citizenship Can Be Expensive.

U.S. Citizens Overseas are often unaware that they have an American tax obligation.

This lack of knowledge is costing many Americans overseas thousands of dollars because of the Foreign Account Tax Compliance Act, which forces banks to reveal the identity, accounts, and investment income of many of these Americans overseas.

All US citizens have a tax and Foreign Bank Account Reporting (FBAR) obligation, wherever they live or work in the world. This is governed by the American law FATCA and enforced by intergovernmental agreements between many countries and the US. The tax in the country of residence can be offset against the taxes owed in the US. This means that you almost always have to file taxes, but don’t necessarily owe any tax. But failing to file US citizens overseas tax can result in high fines.

Here’s what you need to know about these requirements:

FATCA

Banks around the world have been voluntarily scrutinizing their customers in an effort to become compliant with the Foreign Account Tax Compliance Act (FATCA), a U.S. tax law passed in 2010.

Even though FATCA is a U.S. tax law, it has changed the way how banks in other countries conduct their business. Under FATCA, a foreign bank, investment house, or financial institution that is not compliant with the law is subject to a 30% withholding on their U.S.-source income.

A financial institution might have a portfolio of investments in the United States. Under FATCA, 30% of their U.S.-source interest, U.S.-source dividends, 30% of stock sales, 30% of bonds that mature, and 30% of U.S. real estate that gets sold will be withheld as ​a tax before ever reaching the financial institution and its account holders. A dramatically high fine for every bank and financial institute.

FBAR

Not only does the U.S. tax its citizens on their worldwide income, but under the Bank Secrecy Act, the U.S. also requires its citizens to declare the existence of any accounts held by financial institutions outside the U.S. A person must file a Report of Foreign Bank and Financial Accounts (FBAR) annually if they have an aggregate balance of at least $10,000 across all their non-U.S. accounts at any time during the year.

The foreign bank account report is information only. There is no tax or fee that’s due when filing this report. But there are penalties for failing to file this report on time. Civil penalties can reach up to $10,000 per violation or 50% of the account balance at the time of the violation. Whichever amount is higher.

Form 1040

In addition to filing an FBAR with the US Treasury, every American living abroad must also file a tax return. America is the only civilized country that has a citizen-based taxation system. Declaring your worldwide taxes is complicated and important to do properly to avoid paying double taxation. Living abroad, Form 1116 or Form 2555 can be used to avoid double taxation along with various schedules and supplementary Forms.

Permanently renounce your American citizenship

Currently, the only way of completely avoiding paying US income tax is to permanently renounce one’s American citizenship. 

If you’re a US citizen, green card holder, or have dual citizenship, and you have been living overseas, but you didn’t know you had to file a US tax return, it is time to inform yourself about the US tax system and your obligations.

In the year that a person renounces their U.S. citizenship, the person is subject to the regular income tax on their worldwide income plus an expatriation tax, or an “exit tax,” on the unrealized gains of real estate, investments, and other property. Terminating citizenship is a very personal choice. Americans Overseas can only present the pros and cons in this as objectively as possible so that everyone makes a very weighted choice for themselves as to what is right for them.

Americans Overseas helps with information about US citizens overseas tax

We, the founders of Americans Overseas, were born in the Netherlands and obtained our American nationality through our (American) mother. When we heard about this for the first time around 2013, we were in total disbelief (it can’t be true!), anger (how can they do this?), fear (am I going to get fined or pick up other problems?), and panic (what should I do?).

It is (unfortunately) true that there is an additional American tax levy. But there’s no information from local government, and when approached, the consulate referred us to the IRS, and the IRS was impenetrable.

That’s why we started this initiative to help people from all over the world by providing proper information to avoid unnecessary panic, and offering help free of obligation and free of charge. If needed, we have a network of affordable professionals (accountants) who can help you with your tax obligations.

If you have more questions about US  citizens overseas tax you can contact us at Americans Overseas.

Contact us for more information