Expatriate Tax Solutions and International Taxation

Moving abroad does not end your filing obligation. The United States taxes its citizens on worldwide income no matter where they live, and it keeps doing so after you leave, after you retire, and after decades away. Green card holders are treated the same until the card is formally surrendered.

What changes when you move abroad

Less than most people expect. The filing thresholds are the same. What moves is the calendar and the paperwork.

• Your deadline shifts. Living abroad on 15 April gives you an automatic two month extension to 15 June. Interest still runs from April, but the two month extension covers payment as well as filing, so paying by June avoids the late payment penalty.
• You can extend further. Form 4868 takes you to 15 October, and a further discretionary extension to 15 December is available in narrow cases. That one is for filing only. Payment was due in June.
• Green card holders do not get a quieter version. The obligation runs until the card is formally abandoned, and long term residents who give it up can land in the expatriation rules.

The two ways to avoid being taxed twice

Most of the money on an expat return turns on one choice.

• The foreign earned income exclusion (Form 2555). Excludes a capped amount of foreign earned income. You need a foreign tax home and qualify through bona fide residence for a full tax year, if eligible, or 330 full days abroad in any twelve months.
• The foreign tax credit (Form 1116). A credit for foreign income tax you actually owed and paid. It is capped at the US tax on your foreign source income, computed by category, and any excess carries back one year and forward ten. No minimum time abroad, and it reaches dividends, rent, and gains as well as salary.

The rule of thumb: in a country that taxes you more heavily than the US, the credit often wins, because it reaches income the exclusion cannot and the excess is not wasted. In a country with little or no income tax, the exclusion usually wins. You cannot do both on the same dollar, because there is no credit for tax on income you already excluded.

One trap worth knowing. If you claim the exclusion and later revoke it, you generally cannot elect it again for five years without IRS consent. Switching is not a yearly toggle.

What the exclusion does not do

The exclusion has two blind spots:

• Self-employment tax: you can exclude income from income tax and still owe the full self-employment charge on the same earnings. The way out is a totalization agreement, which the US holds with around thirty countries, where a certificate of coverage from the foreign system exempts you.
• Unearned income: dividends, capital gains, rental profit, and pensions sit outside the exclusion entirely, which is another reason the credit does more work than people expect.

Reporting your foreign accounts

Foreign asset reporting runs on two separate filings, different thresholds, and neither replaces the other.

• FBAR (FinCEN Form 114). Required once your foreign accounts exceed $10,000 in aggregate at any point in the year. It goes to FinCEN rather than the IRS, and the deadline is automatically extended to October.
• Form 8938. Filed with your return. The thresholds are higher than the FBAR and higher again for taxpayers living abroad, and they move with your filing status.

Both are information returns, not taxes. Missing either carries steep penalties.

Your former state may still require a return

State residency is decided separately from federal, and a few states hold on. New York can tax you under either of two tests:

• Domicile: your permanent home, which follows you until you genuinely establish a new one.
• Statutory residence: a permanent place of abode in New York for substantially all the year plus more than 183 days in the state, where any part of a day counts as a day.

Leaving the country does not automatically settle either question, and an expat CPA should check both before you stop filing there.

If you have not filed in years

This is the most common reason someone goes looking for an expat CPA, and it is more fixable than it feels. The streamlined foreign offshore procedures cover taxpayers living abroad whose failure to file was not willful. They require:

• Three years of amended returns
• Six years of FBARs
• A certification of non-willful conduct

For those who meet the non-residency requirement the penalty is waived entirely. The version for taxpayers inside the US carries a 5% penalty.

“Anytime you have a major change in your situation, whether it’s your family situation, whether it’s your work, whether it’s income or source of income, you want to speak with the tax adviser and make sure that everything that you’re doing now continues to make sense in the future.”

Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising individuals on cross border and expatriate tax. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.