United States: 5 Common Tax Misconceptions Facing U.S. Persons Living Outside The U.S.

Living abroad can be a wonderful opportunity for many U.S. Persons1, but a few commonly misunderstood aspects of the U.S. tax system directly impact such "expats," often to their financial detriment. Here are the five most common tax misconceptions we encounter in our practice:

  • "I don't owe because I live outside of the U.S."

    • This is the biggie and the most problematic misconception. The U.S. taxes its citizens, green card holders and others meeting its residence test on worldwide income, regardless of current physical location. If you are a U.S. Person living outside of the U.S. you are still subject to worldwide U.S. income tax. Depending on the nature of the income earned, you may face tax payment obligations for even very small or unrealized amounts of income.
  • "I don't make enough to need to file"

    • Too many expats misunderstand the Foreign Earned Income Exclusion 2to negate a need to file (it does not) and to apply to all types of income, including passive income (it does not). You should always check with a U.S. tax professional to understand what forms and information you must file even if you don't owe tax.
  • "I'm below the FBAR threshold"

    • The Foreign Bank Account Report is an information return form on which U.S. Persons list the accounts they hold overseas. The $10,000 threshold is often misunderstood to be applied on an account-by-account basis (it is not, but is actually applied in the aggregate). The result of this misconception is that some U.S. Persons attempt to limit account balances to $9,900 per account, mistakenly believing that they are avoiding a form filing obligation. If he or she holds, in total, $10,000 or more in overseas accounts he or she must file the FBAR form.
  • "My foreign pension is exempt from tax"

    • Not necessarily. Exemption depends upon whether (1) there is a tax treaty in place between the U.S. and the country in which the U.S. Person resides and holds the pension fund and (2) the tax treaty exempts the pension fund. Currently the U.S. only has tax treaties in place with sixty-eight countries. There can also be state-level complications and complications due to the pensioner's residence when he or she receives the funds.
  • "I'm not a U.S. Person"

    • Accidental Americans exist in larger numbers than an average person would believe. Anyone born in the United States is most likely a U.S. citizen and thus a U.S. Person for income tax purposes. Certain long-term residents of the U.S. who have let their "green card" expire or had it taken at the border will remain U.S. Persons for income tax purposes if they have not completed the proper, formal relinquishment process. Even certain persons who spend less than half the year in the U.S. may inadvertently trigger U.S. Person status by not closely tracking their days spent in the U.S. over a three year period.

The tax filing and payment obligations facing Americans living abroad can feel overwhelming at times. Unfortunately, William Simon was expressing a hopeful expectation rather than a statement of current status when he remarked, "The nation should have a tax system that looks like someone designed it on purpose." If you have any questions or are feeling overwhelmed, you should reach out to a competent U.S. tax accountant or attorney to discuss compliance options moving forward. The IRS' Offshore Voluntary Disclosure Program will be coming to an end on September 28, 2018 so there is no time like the present to clear up these misconceptions and set your financial affairs in order.

Footnotes

1 See Code Section 7701(a)(30)...generally a U.S. citizen, a U.S. Green Card holder or someone meeting the Substantial Presence Test

2 See Code Section 911

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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