2013 U.S. Expat Tax Updates for Americans Living Abroad
As expats begin the task of gathering documents for their U.S. tax return preparation, here are some important updates to keep in mind.
Foreign Earned Income Exclusion (“FEIE”)
The Foreign Earned Income Exclusion is a valuable tax benefit that adjusts for inflation each year. For tax year 2013 the FEIE was $95,100 and for tax year 2014 it jumps to $97,600. This means you deduct the first $97,600 you earn. For some expats this exclusion alone could eliminate your entire U.S. tax liability. However, it’s important to remember that you must qualify as an expat to beeligible for this exclusion. You qualify via one of two residency tests: the Physical Presence test (“PPT”) or the Bona Fide Residence test (“BFR”). Many expats qualify by the PPT, which requires you to earn foreign income and be outside the U.S. for 330 of any 365 day period. Note that this is not a calendar year, but a rolling 365-day period. To qualify using the BFR, you must be overseas for at least one year and have no intentions of returning to the U.S.
Foreign Housing Exclusion
This is another exclusion available to expats to reduce U.S. tax liability. With this exclusion, you can deduct a certain amount of your housing expenses. For tax year 2013 the base deduction is $15,616 (it is tied to the FEIE each year). Your exclusion amount is prorated based on the number of days you are abroad. Now, if you happen to live in one of the many cities that the IRS deems to have a ‘higher cost of living,’ your exclusion will be even higher. Here is a sample of the increased allowances for some popular cities:
Sydney, Australia – $32,782
Mexico City, Mexico – $47,900
Seoul, Korea – $56,000
Dubai, United Arab Emirates – $57,164
Montreal, Canada – $60,600
London, United Kingdom – $88,200
Hong Kong, China – $114,300
Tokyo, Japan – $117,100
For a complete list of cities with higher allowances, click here: http://www.irs.gov/pub/irs-pdf/i2555.pdf
Foreign Account Tax Compliance Act (“FATCA”)
If you haven’t heard about FATCA yet, this year you certainly will. FATCA was created to uncover tax cheats hiding U.S. money in offshore accounts. Currently individuals with offshore assets are required to file FATCA Form 8938 if their assets exceed specific thresholds. This form is included with the Form 1040 filing and substantial penalties will be charged by the IRS where the IRS finds you omitted this form. Starting in July 2014, FATCA will require foreign financial institutions to report on the accounts of their American clients. What does this mean? Basically, there is no place for one to hide. If you have offshore assets exceeding the thresholds, you need to report them or your foreign financial institution will! The Form 8938 filing thresholds for expats are as follows:
• Single Filing: $200,000 on the last day of the year or $300,000 at any point during the year
• Married Filing Jointly: $400,000 on the last day of the year or $600,000 at any point during the year
FBAR (Foreign Bank Account Report)
There is a new process for filing your FBAR. The old way of paper filing Form TD 90-22.1 is history. You now need to file FBAR electronically to the US Treasury Department via FinCEN Form 114. The deadline is still the same—June 30th and there are no extensions.
You must file FBAR if you have foreign bank accounts totaling $10,000 or more. Note that this is an aggregate amount over all your accounts and even if you had $10,000 in the accounts on only one day, you will need to file FBAR. Penalties for failing to file can be steep, so if you are required to file, don’t miss the deadline!
The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.
Note that the filing threshold is different for the FBAR than for Form 8938 and the FBAR is filed separately from your Form 1040.
Foreign Tax Credit
If you paid or accrued foreign taxes to a foreign government on foreign source income that is still subject to U.S. tax, you may be able to take either a credit or itemized deduction for those taxes. The IRS allows the foreign tax credit so that you are not doubly taxed on the same income.
Taken as a deduction, the foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your tax liability. Most of the time, it is more advantageous to take foreign income taxes as a tax credit.
To claim the foreign tax credit, you need to fill out IRS Form 1116 unless the amount of credit you are claiming is $300 or less ($600 if married filing a joint return).
The laws regarding the foreign tax credit are complex and the application of the foreign tax credit can vary depending on various factors. For example, if you have foreign sourced qualified dividends or capital gains or capital losses that will affect the amount of foreign tax credit you can take.
Also, the U.S. has different tax treaties with other countries that may limit your foreign tax. The tax treaty with each country specifically addresses the type of income for which the tax credit is available and the rate limitation. For example, the tax treaty with the United Kingdom does not allow a tax credit for foreign taxes paid with respect to interest income. Also, the tax treaty with India caps the foreign taxes paid to 15%.
But in all cases, if the foreign income is not recognized on your U.S. tax return, you cannot claim as a foreign tax credit the taxes paid to the foreign county on said income.
In 2014 Obamacare (otherwise known as the Affordable Care Act) came into effect. While this doesn’t impact your 2013 taxes, you need to be aware of the future impact it can have on you.Obamacare requires that every American hold the minimum essential healthcare coverage—those who don’t will pay a penalty on their taxes. If you qualify as an expat (via the PPT or BFR) you are exempt from Obamacare. If you do not qualify (i.e. you are on a shorter-term assignment or haven’t been abroad long enough yet) or you are ineligible for a qualifying U.S. expatriate healthcare policy, you may be subject to the tax. The penalty for 2014 is the greater of $95 per adult and $47.50 per child OR 1% of your family income (defined as income over and above the filing threshold). If you return to the U.S. after being abroad, you will be required to enroll in a qualified policy in order to avoid the tax.
Staying abreast of the latest tax updates is critical for expats, as these updates can certainly save you money and help avoid costly oversights. If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
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