Where can I start if I want to undergo the Repatriation process?
We spoke with Tyron, who has over 9 years of U.S. expat tax experience, to provide clarity and advice on how to best organise your repatriation to the U.S.
Repatriation to the U.S.
Repatriation refers to returning to your country of origin, in this case expats returning to the U.S. There is a lot of information out there and consequently misunderstanding about repatriation. Due to the COVID-19 pandemic, there is a significant amount of people deciding to move back to the U.S. It is essential that expats moving back to the U.S. understand the implications of moving back, and how to strategically organise their return.
If you are working outside of the U.S. for a full calendar year, then it is a straightforward process in which you can claim the annual exclusion amounts and foreign housing deductions. Most people, however, do not move back on a ‘perfect’ tax date – January 1 or December 31 – but often mid-year. Moving mid-year is certain to have implications on your taxes and thus repatriation planning is essential.
How to avoid state taxation on end-of-service income when returning to the U.S.
Prior to repatriating to the U.S., it is essential to research your state tax guidelines and what income is taxable at the state level, especially if you are expecting a lump sum such as end-of-service benefits. You will not have to pay state taxes if you successfully plan where you will physically be upon receiving this money.
A client left the UAE in December 2019 to move back to New York, and the company they worked for in Dubai did not pay out end-of-service benefits until January 31. As they had already moved back to New York, they were hit with state taxes on this income. If expecting to receive end-of-service benefits and wanting to avoid being hit with state taxes, consider lengthening your period of stay to receive this income before establishing a state tax residency and needing to pay state tax. Another option would be to research other state tax guidelines, and move to a state such as Florida or Texas where there are no imposed state taxes, returning back to your state after receiving the sum.
What can I claim if I repatriate to the U.S. mid-year?
If you move back to the U.S. mid-year, you may still be eligible to claim the Foreign Earned Income Exclusion (FEIE) and/or Foreign Housing Exclusion (FHE) for the part of the year spent abroad. The FEIE allows for a certain amount of your foreign earned income to be excluded from U.S. taxes. The FHE allows expats to claim for housing expenses incurred whilst living abroad. In order to qualify for either, you must have established a foreign tax home and meet either the Bona Fide Residence Test of Physical Presence Test.
If you return to the U.S. mid-year having received foreign income, then continue to work and earn in the U.S., the U.S. will tax you on an annual basis. Thus, you will need to aggregate all income, but your foreign earned income may still be eligible for the exclusion (FEIE).
The FEIE works pro rata, meaning if you return to the U.S. on June 20, the exclusion will only apply for income earned between January 1 and June 20. If your income is below $100,000 USD, the foreign earned income would typically be expected to be excluded. However, it is not an absolute that it will not be subject to tax, due to the stacking rule. The stacking rule requires all income – foreign and U.S. – to be added together and then tax the corresponding gross income. The taxes on your exclusion will be computed and whatever tax corresponds to the exclusion will be deducted from tax on your gross income. There are some instances where you will pay a little more tax than you expect, depending on the level of income and tax bracket you are in.
Do I revert back to using a CPA for my taxes?
You may be wondering when you are able to revert back to using a local CPA (Certified Public Accountant) to get your taxes done in the U.S. You can engage with local CPAs once you are living back in the U.S. for a full calendar year, with no foreign earned income involved. However, on the year of your move back it is helpful to engage with specialists or those who specialise in expat U.S. taxes. They can provide you with their expertise on the implications of repatriation, the FEIE, FHE, and what you are able to claim.
Offloading property prior to your return
If you have bought property abroad that you wish to offload before moving back, it is also important to organise everything beforehand. Prior to moving back and establishing a state tax residency, sell the property and receive all profits to avoid state taxes on capital gain.
Closing a foreign bank account and filing FBARs
You may have received money into a UAE bank account, transferred it over to the U.S. and afterwards closed the UAE bank account. Many think if you close a foreign account, you do not have to file the FBAR (Foreign Bank Account Report). However, you still have to check the total highest balance of all foreign bank accounts from January 1 until the date you closed the account. Expats with an amount exceeding $10,000 USD will still have to file. However, the threshold is not per account, meaning if you had two bank accounts, you must add the two total highest balances. If it exceeds $10,000 USD (for example, $8,000 USD in one account and $3,000 USD in the other), you must file the FBAR.
Contact us at Expat Tax Online to learn more.