Tax Updates and Information for US Expatriates

Allen Barron, Inc.

US tax filing is underway, and as we approach the April 15 deadline we would like to offer additional tax updates and information for US expatriates. The first and most important thing for US expatriates to know about taxes is the United States taxes the worldwide income of any US citizen and taxpayer. If you still have a US passport and citizenship, you are required to file a tax return and pay taxes to the IRS (and, in some cases, a former US state of residence or two).

Many US expatriates fail to file a tax return with the IRS each year. In some cases, it is simply because they believe they are not responsible for paying taxes on the income they earn overseas. The US expat may file taxes in their nation of residence and, therefore, believe they do not need to file a tax return with the IRS. In other cases, annual income doesn’t exceed the 2023 Foreign Earned Income Exclusion (FEIE) of $120,000, and the expat doesn’t believe they will owe any taxes. While this may be true, filing a US tax return is always in your best interests.

Let us consider the case of an expat client who did not file a US tax return for more than ten years. When the IRS learned of their offshore accounts and activities the agency imputed income to the US expat and demanded back taxes for more than 10 years. The expatriate mistakenly believed there was a look-back limitation of seven years, and that the IRS could only audit returns for the past three tax years in an audit. These limitations (legally referred to as statutes of limitations) are accurate – for those who have filed a US tax return.

Any statute of limitations begins on the actual date a tax return is filed. If a US taxpayer does not file a tax return, there is no statute of limitations, and the IRS can impute whatever income or tax levy they wish. It is the responsibility of the US taxpayer to prove them wrong. The individual in this case hadn’t even kept records for many of the years the IRS was including in their demands. The resulting effort to reconstruct the past, prove what was possible to document, and ultimately negotiate with the IRS to reach a settlement to avoid further penalties and interest and FBAR consequences was long and expensive. If you are a US taxpayer, you need to file a tax return for no reason other than to establish a statute of limitations.

One of the most important tax updates and information for US expatriates relates to the opportunity to obtain previously unclaimed COVID-19 stimulus payments. Three separate stimulus payments were available to US taxpayers resulting in direct payments between April 2020 and December 2021. The three rounds of stimulus offered a total of $3,200 per taxpayer and an additional $2,500 per child. There are limits on income before reductions take place; however those US expats who did not file a 2020 or 2021 tax return or claim these benefits may retain some or all of their eligibility.

There are a few important decisions to be taken as a US expatriate regarding the FEIE. One must consider issues such as the potential benefits of the Foreign Tax Credit and the Child Tax Credit and whether an election to claim the FEIE might preclude or reduce the impact of these potentially important tax credits. For example, claiming the FEIE might eliminate a potential refund that might be obtained through the combination of a Foreign Tax Credit and the Child Tax Credit. This is why it is important to consult with a US tax attorney or expat tax expert who will analyze your unique circumstances and help you determine the best option(s) to reduce taxation and or increase the amount of a potential US tax refund.

Other important tax updates and information for US expatriates are focused upon important deductions associated with children and housing. The Child Tax Credit is an option for US expats with qualifying dependents under 17 who have a Social Security Number. The Child Tax Credit is accessed through Schedule 8812 – Credits for Qualifying Children and Other Dependents. Schedule 8812 and its instructions should help to establish qualification and the benefit of this option for the US expat.

Form 2555, Foreign Earned Income, is another important tax form for US expatriates. Form 2555 guides US expats through issues associated with the FEIE as well as housing exclusions and/or deductions. A lot will depend upon the source(s) of your income and whether an employer is contributing to or providing your housing. US expats who are self-employed or responsible for their home ownership or rental may wish to claim the Foreign Housing Exclusion to reduce their tax burden.

The tax filing deadline of April 15 is automatically extended for US expatriates to June 17, 2024, if necessary. There are several important reasons for US expatriates to fully understand their opportunities as US taxpayers and their ongoing responsibilities as US citizens. The statute of limitations on the ability of the IRS and US state tax agencies to impute income or audit your taxes begins on the date you file a given return. Failing to file a return opens US expatriates to unnecessary risks as well as financial and even criminal exposures.

Ignorance is not an excuse under the law, and the IRS is cracking down on US taxpayers with offshore accounts, business interests, income and assets. There are opportunities to protect your income and assets while reducing the impact of taxation as a US expat. This is why it is important to seek the advice and counsel of a US tax attorney or expert tax professional. There are always opportunities to protect our expatriates from double taxation and genuine risks associated with IRS and state tax returns. Transactional planning and international tax planning can protect all you have worked so hard to build while minimizing the impact of US and foreign taxation on US expatriates.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Allen Barron, Inc.

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