SEVEN IMPORTANT TAX TIPS FOR AMERICAN CITIZEN EXPATRIATES
and Frequent Questions
- If you are a permanent resident in a foreign country on December 31, you receive an automatic extension to file your tax return until June 15 of the following year. However, you must still pay any U.S. tax you may owe by April 15 or be subject to interest and penalties.
- You can claim an exemption from U.S. Income tax of up to $78,000 (for 2001) and $80,000 (for 2004) in earnings from employment or self employment while residing outside of the U.S. for a full calendar year, or for any fiscal 12 month period providing you are not in the U.S. for more than 30 days during that fiscal year. Both you and your working spouse can each separately claim this exemption for up to $160,000 in U.S. tax free income.
- You can claim a credit against your U.S. income taxes for foreign income taxes you pay in another country.
- The U.S. has tax treaties with more than 35 nations throughout the world. Many of these treaties contain special provisions which only apply between the U.S. and the other treaty country. These treaties all contain provisions in which the U.S. can obtain tax information about U.S. Citizens living in the other treaty country and the tax authorities in that treaty country can secure information about their citizens from the IRS.
- If you reside outside of the US and are married to a spouse that is not a U.S. Citizen or permanent resident (green card holder), your spouse does not have to pay U.S. taxes on their investment and employment income if you do not file a joint return.
- When you live in a foreign country you can obtain a social security number for your children by obtaining Form SS-5-FS through the Social Security Admin website at www.ssa.gov. Also for more on countries with U.S. Social Security treaties and if you are self employed abroad click anywhere on this sentence.
- While living abroad, if you take the proper steps to terminate tax domicile or residency in your previous home state (the rules vary from state to state), you no longer have to file a state income tax return and as a result eliminate your state taxes! California, Virginia and New Mexico are several of the states that make it very difficult to terminate your tax residency when moving abroad.
ANSWERS TO SOME OF THE COMMON EXPATRIATE TAX QUESTIONS
May I file a Joint Return with A Nonresident Spouse?
Yes you can but does subject your alien spouse’s worldwide income to U.S. income tax. Often there are tax savings available due to a lower foreign tax rate for not filing with an alien spouse and just filing “married filing separately.
Must I File a U.S. Return even if I make less than the $80,000 exclusion?
Yes. If you fail to file a return and claim the exclusion there is a risk that the IRS may discover you are not filing returns and disallow the exclusion when you do file. If you come forward first before IRS notification and file all past unfiled expatriate returns, the IRS currently always allows the exclusion.
If I am a Green Card holder living outside of the U.S., do I still have to file a U.S. tax return?
As a Green Card holder you are a U.S. permanent resident and must file a U.S. tax return each year on your worldwide income. However, you can exclude up to $80,000 of foreign earned income under IRC 911 earned income exclusion rules if you qualify under the physical presence or bonafide residence rules.
If I am living and working abroad, do I have to file a U.S. state return each year?
There are 50 states with 50 different rules on this question. If prior to leaving the U.S., you lived in a no tax state such as Nevada, Washington, Texas or Florida no return is required. Some other states say if you are gone for more than six months, no return is required. Other states such as Virginia, South Carolina, New Mexico and California look at whether you still have a “tax domicile” in the state and then still require you file a return tax returns (for all years of your absence) even though you have been gone for years. They look at your intent to return to the state after your stay abroad, and various indices that may indicate you never planned on giving up your “tax domicile” such as if you still maintain a state drivers license; state voter registration; library card; bank accounts; real property; license plates for your car; or if you children still go to school in the state.
If you want to avoid tax problems with your previous home state with “tax domicile laws” many years down the line demanding you file state income tax returns for the entire period you lived abroad, and demanding you pay all of the taxes, interest and penalties due for that period, you should not move back to that state when you return permanently to the U.S. You must also upon moving abroad give up all state drivers licenses, bank accounts, real property, voter registration, etc. Not all states are this tough, but some like Virginia, New Mexico, South Carolina and California do impose very tough rules. Investigate the tax law in your state of residency prior to your departure to live abroad to avoid having to file state tax returns with some certainty that those state taxes will not later be assessed while you are still abroad or upon your return. TOP
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