Answered Questions About Expat US Taxes: Part 2
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.
Does it make sense for me to save extra into my retirement account?
Your retirement income is in excess to your excluded income – therefore as an expat living overseas, it will be bumped into higher tax rate. However, there are still standard reductions which have the potential to reduce your taxable retirement income. Don’t think you are being taxed at a higher rate because you’re an expat, as it will likely average out.
Receiving a retirement fund while working for a US company is possibly the best way to save for retirement under 401(k) or 403(b), which allows you to contribute up to $18,000 – substantial savings for retirement. The idea is that by deferring taxes while working, once you withdraw this money when you are retired, your non-existent or lower income will reduce the tax rate and you will save.
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401(k) is provided only through a US employer, which means they can contribute more – $18,000 a year. However, money has to be taken out starting from when you’re at retirement age (59 and ½). In comparison, with a Roth IRA you can contribute until you are 65 and can defer distributions until you are 65. Giving you an extra 7 years of contributions and not needing to withdraw money.
Whether you can contribute to a Roth IRA depends on you income level, as you need to have a net positive earned income. If you are fully excluded, your AGI is already at 0 and you will not be able to contribute. You will need an analysis of your income and see if adjustments can be made. For traditional IRAs, your positive earned income is used to contribute and you are still able to contribute and save for your retirement even if fully excluded. It requires a case by case analysis.
Generally, 401(k) or 403(b) is a good option if you are planning to save for retirement. If you need more assistance or want to know how it works, we are here to have a chat and provide you with a quick calculation.
Receiving a retirement fund while working for a US company is possibly the best way to save for retirement under 401(k) or 403(b), which allows you to contribute up to $18,000 – substantial savings for retirement. The idea is that by deferring taxes while working, once you withdraw this money when you are retired, your non-existent or lower income will reduce the tax rate and you will save.
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Which retirement plan is best?
The 401(k) and 403(b) plans are similar and one isn’t necessarily better than the other, and there is no yes or no answer to whether you are being taxed at a higher tax rate just because you are fully excluded.401(k) is provided only through a US employer, which means they can contribute more – $18,000 a year. However, money has to be taken out starting from when you’re at retirement age (59 and ½). In comparison, with a Roth IRA you can contribute until you are 65 and can defer distributions until you are 65. Giving you an extra 7 years of contributions and not needing to withdraw money.
Whether you can contribute to a Roth IRA depends on you income level, as you need to have a net positive earned income. If you are fully excluded, your AGI is already at 0 and you will not be able to contribute. You will need an analysis of your income and see if adjustments can be made. For traditional IRAs, your positive earned income is used to contribute and you are still able to contribute and save for your retirement even if fully excluded. It requires a case by case analysis.
Generally, 401(k) or 403(b) is a good option if you are planning to save for retirement. If you need more assistance or want to know how it works, we are here to have a chat and provide you with a quick calculation.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
STREAMLINED AMNESTY
It’s for American citizens that didn’t know they had to file U.S. 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. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
Form 8621 / PFIC – When do I need to file?
A PFIC (Passive Foreign Investment Company) occurs when a U.S. person invests directly or indirectly into a Passive Foreign Investment; such as a non-U.S. mutual fund.
If you discover you have one or multiple PFICs, you will need to attach Form 8621 with your tax return, or if you are not required to file an income tax return, file the form directly with the IRS. A separate Form 8621 must be filed for every PFIC in which stock is held, directly or indirectly.
The threshold for filing Form 8621 depends on your filing status. If you are married to a foreign national, you are required to file Form 8621 if the combined value of all your PFICs exceeds $25,000 USD at end of the tax year. However, there are cases where you are still required to file irrespective of the value of your PFICs. For example, if you have made an election in respect to your PFICs in recent years. This election could either be Qualified Electing Fund (QEF), or Mark to Market (MTM). Or, you may be required to still file if there are excess distributions during the current year; meaning if the current year distribution exceeds 125% of the average distributions in the past 3 years. To know more about PFIC filings, we recommend reaching out to a US tax specialist.
Can a divorced couple have the same dependent?
You cannot claim your dependent on your income tax return if your ex-spouse does so too. You can only claim a dependent if they are not claimed on any another income tax return.
In order to qualify to claim a dependent, you must have also provided financial support, and they must have lived with you for at least 6 months in the year.
With more than one child, claiming one child each will be an ideal situation for you and your ex-spouse.
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 program.
I'm taking money out of my Superannuation account, do I have to report it to the IRS and do I have to pay US tax on it?
The simple answer is that it always depends.
Generally, money take out of an Australian
Superannuation fund by a US citizen It is taxable by the US. Any AUD taken out is converted to USD and entered on your US tax return (1040), where there is a line for pension income where this amount would go.
However, the full amount isn’t always taxable. Multiple questions need to be assessed to figure this out, such as whether the original employer contributions that went into this superfund were ever disclosed on a prior year US tax return? Or, as the fund was earning income throughout the years was this disclosed on a prior year US tax return? Additionally, what industry or entity you are working in and whether there are any tax treaties will be considered.
Each case will need to assess many different factors, but the starting point is always yes it is taxable as pension income.
How do you report Australian Superannuation?
Australian Superannuation is not deemed a qualified plan for US tax purposes. Therefore, for FBARs and potentially for Form 8938, we include the Superannuation account. Therefore, getting the highest values in each account for each calendar year is important information for compliance.
Secondly, because it is not a qualified plan, to the extent that there are yearly employer contributions yearly into the plan, then we would have a look to include those contributions as additional income for US purposes. This does not necessarily mean additional US tax, as the Australian tax rate on salary and wage income is higher than the US rate – the excess taxes on the rest of your salary income can eliminate US taxes under Superannuation contributions.
You also can have a situation, depending on how much salary and wage income you earned in the year, where instead of just reporting employer contributions you report the movement and value of the Superannuation fund from one year to the next – it captures the earnings within the fund.
Finally, there are a couple of situations where you will have to report everything about the fund. This is the case when it becomes deemed a Foreign Grantor Trust. Whether this is the case will be assessed on a case by case basis. Where there are large amounts of contributions from the individual that outweigh the employer contributions, there will be additional filing requirements (Forms 3520 and 3520-A) and it will need to be considered how the investments within the fund will be reported as well. As long as the contribution from the employer is higher or equal into the account than personal contributions then you are fine.
Secondly, because it is not a qualified plan, to the extent that there are yearly employer contributions yearly into the plan, then we would have a look to include those contributions as additional income for US purposes. This does not necessarily mean additional US tax, as the Australian tax rate on salary and wage income is higher than the US rate – the excess taxes on the rest of your salary income can eliminate US taxes under Superannuation contributions.
You also can have a situation, depending on how much salary and wage income you earned in the year, where instead of just reporting employer contributions you report the movement and value of the Superannuation fund from one year to the next – it captures the earnings within the fund.
Finally, there are a couple of situations where you will have to report everything about the fund. This is the case when it becomes deemed a Foreign Grantor Trust. Whether this is the case will be assessed on a case by case basis. Where there are large amounts of contributions from the individual that outweigh the employer contributions, there will be additional filing requirements (Forms 3520 and 3520-A) and it will need to be considered how the investments within the fund will be reported as well. As long as the contribution from the employer is higher or equal into the account than personal contributions then you are fine.
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