Tax Returns Made Easy For US Expats

Living outside of the U.S. has many rewards as well as challenges for those Americans who chose to take on the role of being an expat. Amongst all the cultural and language barriers, there is still one fact that remains regardless of where you are living in the world – you need to file your U.S. tax returns! There are a handful of exceptions to this rule based on your gross income, filing status and age, but they are few and far between. One common misconception is that you don’t have to file a US tax return if you have filed and paid tax in the country in which you reside. That is not true. You must file a tax return regardless (although having paid tax in your country of residence in most cases will reduce your tax liability. If you have over $10K (at any time of the year, cumulative in all your accounts) in foreign bank accounts, you must report this to the IRS by June 30th using the FBAR form.

The IRS has taken a renewed focus in expats living abroad and those with overseas bank accounts. This not only applies to the wealthy who have tried to conceal their money in Swiss and Cayman bank accounts, but also those that are just living abroad and have a simple checking or savings account. The IRS considers any foreign account to be a potential tax avoidance vehicle and unfortunately by their rules, you are guilty until proven innocent. In order to comply, you must report these bank accounts that are over $10K to the IRS along with filing your tax return.

If you live in a foreign country and receive income from foreign source, you are subject to the foreign earned income exclusion. For 2010, the first $91,500 in foreign earned income is considered tax-free by the US government, however this income needs to be earned and does not include things such as rental income, dividends, interest, etc. It is also important to note that if you are receiving income from U.S. sources, such as a consulting company abroad with U.S. clients, this income cannot be excluded and is also subject to tax.

Besides excluding your foreign income, it is important to note that you can also claim a credit for all foreign taxes paid in your cost country through form 1116. However, your foreign tax credit cannot exceed your US tax liability (this liability is actually determined as a percentage of your total foreign-source income divided by your total worldwide income). Any foreign tax credit amount in excess of the maximum limit may be carried back to a previous tax year or carried forward to up to 10 years in the future.

You can also exclude amounts paid by your employer for housing. This includes any amounts paid directly to you or on your behalf for housing, rent, education for your children, or tax equalization (“gross up” payments).

The following expenses qualify for the foreign housing exclusion:

Rent,
Fair rental value of housing provided by your employer,
Repairs,
Utilities other than telephone,
Real property and personal property insurance (homeowners & renters insurance),
Occupancy taxes,
Nonrefundable security deposits or lease payments,
Furniture rental,
Residential parking fees.
Tax equalization payments paid by your employer,
Education expenses for your dependent children.

The official deadline to file your U.S. tax return in 2011 is April 18th but US expats get an automatic extension to June 15th. Even though US expats get the automatic extension to June 15th, if they owe taxes, interest accrues as of April 18th. It’s probably safe to say that its time to get the ball rolling on your taxes this year!

If you are looking for some assistance with your US tax return, you can contact our partner for this, Vincenzo Villamena. Vincenzo can be contacted through his company website, Online Taxman, at: http://www.onlinetaxman.com/

Vincenzo has extensive experience in both tax preparation and advising clients in accounting and financial transactions. He has “Big 4” audit and corporate accounting experience during his time with PricewaterhouseCoopers.