Do I have to file?
That depends if you are a US citizen or a US Green Card holder. The general answer is yes. It is dependent on your income level and your filing status as well. But assuming your income is over a relatively small amount given your filing status and if you are a US citizen or a US Green Card holder, the general condition is that you should file a US return each year to report worldwide income. On that return, you can also claim various Foreign Earned Income Exclusions or claim Foreign Tax Credits – whichever produces the best result, that may bring your US tax down to a relatively small amount or possibly down to zero. But it is still important to file that return each year to prove that to the IRS. Even if you’re living outside of the US and spending a lot of time in Mexico and South America, you should still file a US tax return and report all your worldwide income on that tax return.
You’ll need to file a 2020 US tax return when your annual worldwide income exceeds these thresholds:
- If you’re single with gross annual income over USD $12,400
- If you’re married to an American or a Green Card holder with joint gross annual income over USD $24,800
- If you’re married to a non-American with gross annual income over USD $5
- If you’re Head of Household (Married or Divorced with US dependents) with gross annual income over USD $18,650
- If you’re Self-employed with net annual income over $400
But it’s not US income.
Doesn’t matter as long as you’re a US citizen, you have to report worldwide income on your US tax return.
But I’m already paying taxes in Mexico.
That’s okay. You still must file a US tax return reporting worldwide income and then claim either a foreign earned income exclusion or foreign tax credits. You may end up with not having to pay any US tax after the credits. In order to keep the IRS happy and save yourself from penalties, you must file that 1040 federal US tax return.
I haven’t filed for 10 years, do I have to go back?
Not necessarily. Although we’d want to review all the facts, there can be cases where it’s to your advantage to file all the tax returns going all the way back so that you can maximize your foreign tax credits to carry forward and get a benefit in the future. However, if it’s not necessary to go all the way back, we can work out a system whereby we use the Streamlined Filing Procedure to only go back three years for the tax returns and six years for the Foreign Bank Account Reports (FBARs). That would mean much less cost to you, but also it would mean you would be fully compliant with the IRS. The IRS would accept all of that as complete and up to date – and you wouldn’t have an exposure to any penalties with regards to late filing or late payment.
What happens to the years I missed out?
Provided you fit the requirements of the Streamlined Filing Procedure, you would not have to file those earlier years.
What is the foreign tax credit for?
Say you’ve been living or working in the UK, Canada, Australia, France, or wherever you are, you would already paying some tax in that country – and therefore you shouldn’t have to pay double tax on the same income. So there’s a system whereby even though you file a US tax return, reporting all your worldwide income, you can claim a foreign tax credit on the US return to offset the US liability so you do not have double tax on the same income. It works for US citizens in many countries where the incomes tax rates are higher than they are in the United States.
How can I get a refund if I don’t pay any US tax?
It is possible to file a US return and get a refund without paying any tax in the first place. So even though you may not have earned much income and you may not have to pay any tax, you can actually get a refund provided you fit all the requirements in regard to certain credits. For example, the Child Tax Credit. We would have to look at the facts case-by-case and determine whether you are entitled to that credit but we can often get refunds for people that file US returns and have children that hold US citizenship.
I have two young children, is it possible to get a refund and how much is it?
Definitely a possibility. Generally, the refund is up to $1,400 per child per year. As long as you are entitled to that – often we can go back three years and you’ll get the refund for all three years.
I worked in the US many years and I moved to Canada. What about getting my Social Security from the US?
Yes. You should still qualify for your Social Security benefit. So moving overseas should not change your entitlement to that. So it’s important to see first of all, if you’re entitled to it. Usually if you’ve worked in the US for at least ten years and made contributions to the US Social Security system – or if you’re married to a person that has lived and worked in the US for ten years and paid into the system for ten years, then when you retire, you should be entitled to that benefit. So it doesn’t matter where you live when you retire you should still be able to get your Social Security benefit and the Social Security administration at ssa.gov will tell you exactly what you’re entitled to.
I’ve got two children, one has a Social Security Number. The other was born outside of the US, should I register them as an American and get their SSN?
You certainly can and often it provides them a benefit and an opportunity later to have that official US citizenship registration with Social Security number. Certainly with regards to filing of tax returns, you will need that Social Security Number so it’s good to do it early.