American U.S. Expat Tax Filing for Expats in Hong Kong.
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You may leave the United States, but the United States never leaves you!
The title above is especially true when it comes to the IRS. If you are a U.S. citizen and just happen to be residing abroad, you will absolutely, positively owe American expat taxes on the income which you make worldwide. Even if you give up your citizenship to avoid those United States taxes, it won’t work; which is, by the way against the law.
Remember back when you were young and rebellious, you said “Big Brother is watching”? Well, it’s true, he is. At least it’s the case if you’re a U.S. citizen living abroad. Thing is, the United States has tax treaties with many of the countries around the world and they exchange data, specifically for tax purposes. There are even agents in each of those countries to ‘help’ United States citizens living abroad with their American expat taxes should they have questions or need support. And yes, they do report to the IRS if they know of someone not filing their United States tax returns.
Here’s a real kicker, the IRS has actually bribed foreign investment advisers and bankers in order to gain lists of U.S. citizens’ businesses or offshore bank accounts. They use this information to be sure that they are receiving accurate American expat tax returns from those citizens. Ignoring it won’t make it go away either; the statute of limitations never expires on the year not filed. So the advice is that you file a return even if you’re not pulling in the minimum amount of income required to file a tax return. Better to be safe than sorry.
Of course there are exceptions, or at least stipulations, to every rule.
If, during any consecutive 12-month period you lived abroad for at least 330 days, the IRS is willing to give you a break. They will allow you an exclusion of up to $74,000 of your income from taxation by the United States. Should you happen to be married, and once again earning and residing in Mexico, as long as both you and your spouse are working, you can both exclude the $74,000. Of course you have to file a return in order to take advantage of this. But the IRS doesn’t stop there; they’re willing to give you another $74,000 break if your living expenses together with the rent on your overseas residence exceed a predetermined amount that has been set by the IRS.
If you have to pay taxes in the country of your overseas residence, you can claim that on your United States taxes and will receive a foreign tax credit, thereby offsetting the taxes you would owe the Feds. This credit cannot be more than you would pay the United States on the same foreign income. If it is greater, you will be able to take the excess and carry it forward years in the future when it might benefit you.
Social security and self employment.
As far as foreign taxes are concerned, should you be an actual employee of an overseas employer, and pay not only the countries taxes but the social security as well; you will not have to pay a self-employment tax or social security tax in United States. This may not apply in some countries if you own your own business.
There’s always a penalty!
Special forms to avoid special penalties are required by the IRS. Instances in which this may apply would be if you own in excess of 5% of a foreign corporation. If it is a “controlled foreign corporation”, you might owe more taxes. If you are a trustee or beneficiary of an overseas trust, another form will be needed; signature authority or ownership of an account overseas (if a balance of $2000 United States currency was achieved any time during the year) that’s another form, such penalties can be enforced further down the line years after filing.
The date remains the same.
April 15 is still the deadline – D Day – to have those American expat taxes filed even though you’re living abroad. Extensions can be granted should you have your permanent abroad residence on April 15th of the year. You can also apply for further extensions if need be. Penalties and interest will be applied if you fail to file on time.
The exception to the rules.
If you fit the criteria of permanent residence abroad, you will not need to file a state income tax return for the state of previous residence. Determining factors for residence are voter registration, driver’s license, bank accounts, car license plates, whether you own or rent property in the United States, the receipt of any United States utility bills for that state and more. The United States will come looking for you unless you eliminate or reduce all signs of residency inside the U.S. California is one of the more serious states when it comes to chasing overseas people that owe taxes. The entire issue of residency is a touchy subject and should be approached delicately and by well informed individuals.
Even if you’re not a resident of a U.S. state anymore but still receive income from a business or trade, or receive income from rentals, you’ll have to pay taxes. Dividends, stock sales and interest will not be subjected to tax unless you are living in the state. Should you permanently leave the state from which you are earning a pension, that pension is no longer taxable.
We can work it out.
Payment plans and compromises are frequently able to be worked out. Sometimes, as little as pennies on the dollar, can be a workable compromise. 10 to 15% of the total amount owed can sometimes be worked out to fulfill an “offer to compromise”. IRS numbers show 25% of those offers as accepted with 18% of total amounts to being settled for. Of course, there are required forms to fill out and the entire process takes approximately six months. The IRS is accepting more and more of these offers due to hardship claims and it is projected that the offers of compromise will increase in number and acceptance in the future.