Answered Questions About Expat US Taxes: Part 1
Our team of tax experts bring clarity to your US tax questions. We’ve handpicked/curated the most commonly asked questions from Americans living abroad using our Facebook Help Group community.
How can I avoid paying income tax to the US?
How can I avoid paying income tax to the US?
As long as you are a US citizen, your income is reportable on your US tax return even if you are using a foreign passport. To receive an investors visa in the UAE, you need to invest a certain amount of money into a corporation and if you own 10% or more of a foreign company, you have to file an additional US tax form – Form 5471. Consult with a US expat tax analyst before getting an investors visa to understand the filing requirements.
Worst case stories from dual citizens owing the IRS
Worst case stories for US taxation for superannuation, investment properties and shares. The worst case for superannuation is often when the contributions and/or earnings have not been declared in US tax returns for many years, and distributions are made from the super, resulting in taxable income for US purposes. Additionally, if the super fund meets the definition of foreign grantor trust and individuals have not been filing the required forms 3520 and 3520-A, there are severe penalties. For investment properties, gains and losses on these investments are determined by calculating the difference between sale and purchase price, but there are different exchange rates at play and values may vary from the date of purchase to the date of sale. Volatility in exchange rates and length assets are held mean there are different valuations between USD and AUD. Sales prices can be inflated from the date of purchase, with larger gains on the US side that are subject to tax, resulting in residual taxation that you were not expecting.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file US tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
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Embarking on an international journey shouldn’t mean navigating the complex world of US taxation alone. If you’re living and working abroad, our friendly, supportive Expat Tax Online Help Facebook group is here to assist. We’ve designed a community that serves as a comprehensive guide and resource platform tailored for US expats.
Which should I file first? US taxes or Foreign taxes?
Assuming that you get all of your income from France, for example, it is better to file your French income tax return first to determine your French income tax liability that you can claim as foreign credit on your US income tax return. Consult a tax professional to ensure the correct amount of foreign income taxes are properly reported and claimed on your US tax return.
Haven’t lived in the US and have paid foreign taxes – am I meant to file in the US?
You are required to file your US income tax return if your annual income exceeds the filling threshold for a given year. For the tax year 2023, the threshold is $27,700 for joint filers and $13,850 for single and separate filers. This annual income includes all income received regardless of its source. As a US citizen you are taxed on your worldwide income, however there are provisions in place to avoid double taxation. This includes the Foreign Tax Credit (FTC), Which allows you to claim as credit the taxes paid in another country against US taxes, dollar for dollar. There is also the Foreign Earned Income Exclusion (FEIE), which allows you to exclude around $100,000 USD of your foreign earned income from your US taxes. To know more about these provisions and ways to get updated with your US tax filing, reach out to a US tax specialist.
How does my UK pension get reported to the IRS?
The US tax treatment for workplace pensions in the UK, such as University Superannuation Schemes, generally is not that complicated. There is a provision in the income Tax Treaty between the UK and US, that allows tax payers to defer reporting of income in the fund until there is an actual distribution. Also, since the workplace pension is considered a foreign financial account, it needs to be reported on the foreign bank account form, assuming the filing threshold was met. Be mindful of the amount of contributions made to the fund – once your personal contributions exceed 50% of the total contributions to the fund, it will result in additional tax filings. When this happens, the US will consider the pension account as a foreign grantor trust, and a different tax treatment will apply.
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If my UK income is less than required and I was in the US, can I just do it in 2021?
No, you still have to file a US tax return to report your worldwide income from January to December 2023, if you are over the US filing threshold. As a single filer, the threshold is $13,850; for joint filers, $27,700; for head of household, $20,800; for married filing separate, it is only $5. Regardless of your filing status, if you earn self-employment income of at least $400, you may need to file that tax return in the US. Read more here…
How dividends would be taxed from the US paid to a UK resident?
As a UK resident, your US dividend income is subject to UK taxes at UK tax rates. As a US citizen, this income is also taxable on your US return, resulting in double taxation. You can avoid this double taxation by claiming foreign tax credit (FTC), using taxes paid to HMRC to offset US taxes on foreign source income. Dividend income from US corporations is not considered foreign income so you cannot claim foreign tax credit on this. However, the US has a Tax Treaty with the UK and you are able to claim the lower tax rate of 15% on your dividend income. You still have taxes to pay, but it will be lower because of the Tax Treaty. We recommend engaging with a US tax specialist to prepare you US tax returns to ensure you get these benefits.
Considering US citizenship renunciation but I've never filed a US tax return
All US citizens who earn income have a tax return filing obligation. If you have not registered or recognized your US citizenship, the filing obligation still exists. However, there are options available with the IRS to get you up to date with your US taxes – including the Streamlined Amnesty Program. If you can show that your non-filing was a result of non-willfulness then you are eligible to participate in this program. If you are considering expatriating – formally giving up US citizenship – look into the IRS relief procedure program.
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