April 15 is Tax Day in the US … the filing deadline for most US taxpayers. Those who don’t file today are likely businesses and other entities that operate on a fiscal year basis, rather than a calendar year.
And then there are the canny old farmers, who never owe tax because they show a loss, year after year, due to depreciating (possibly rusting) farm equipment. Penalties and interest are mainly based on taxes owed; if you don’t owe and so don’t file … that pile of receipts on the dining table can turn into a regular ‘garbology’ dig.
For Americans living abroad, however, the rules are a little different. If our income is from a foreign source, we usually file our host country taxes first and then carry the totals to our US return. For this reason, the filing deadline for taxpayers living outside the US is automatically extended to June 15. This allows time for the local filing deadlines, followed by the US one. Note that you may have state income tax returns which don’t grant the automatic Federal extension, so be careful to check this.
Americans with higher incomes, businesses abroad, or those with just slightly more complicated financial holdings usually retain an accountant or hire one for the tax reporting task. Likewise, those whose grasp of the host country’s legal language is light may benefit from professional help. It certainly relieves the anxiety inherent in second-guessing the correct transfer of figures from one country’s return to the US 1040.
Adding to the anxiety is the notoriety gained in recent years by the FATCA and FBAR reporting requirements. The penalties for non-reporting can be stiff and ‘retro-active’ for those who return to the US after a long absence and years of non-reporting. Herein lies a special ‘hidden trap’ for those children of Americans who grow up abroad with US citizenship they’ve barely recognized and never used. In times, like the present, when host-country economies may be sagging, many look to the US as an alternative work place. Once in the US, they may find a surprise, in the form of those accumulated penalties from years of FATCA/FBAR non-compliance.
The reporting rules hit different taxpayers in different ways. At the high end, it may mean either paying extra taxes or paying a professional to help avoid extra taxes. At the low end, for those marginally employed or receiving pensions, meager incomes may be further stressed by the need to pay an accountant. A number of organizations have taken up opposition. Some, such as Republicans Overseas, favor abolishing FATCA. Democrats generally see the ‘anti-money-laundering’ goals as important but seek less harsh treatment for taxpayers. And non-partisan groups such as American Citizens Abroad, encompass both views. Still, some Americans, in particular those with no plans to return to the US, have renounced their citizenship over the matter. With its tradition of being ‘the one passport everybody wants,’ the surrender of US passports has produced screaming headlines in the financial press back home.
Democrats Abroad formed up a FATCA Task Force several years ago to seek solutions to the tax reporting difficulties. DA’s basic suggestion is ‘same country, safe harbor.’ If adopted as an IRS rule, this would allow those who live, earn and bank in just one foreign country and who owe no US tax above what they pay in the host country to file a simple statement with the IRS that they owe no US tax. Remember that in many countries income tax levels and tax brackets can be substantially higher than in ours. In support of SCSH, lawmakers are being asked to sign on to a letter to Treasury Secretary Jack Lew and further solicited by door-knock campaigns whenever DA delegations are in DC.
The next phase, encoded in the DA Platform and carried forward by the DA RBT Task Force, is Residence Based Taxation. The US is one of a tiny handful of countries that base tax obligations on citizenship rather than country of residence and that chase delinquent citizens around the globe. Enacting RBT would require legislation. Because this is almost a matter of political philosophy in the US Congress and Treasury Department, this is much more than a simple rule change and will take more time. In the meantime, US taxpayers abroad are faced with compliance, like it or not.
More changes lie ahead, including one slated for January 2017 that’s expected to complicate relationships with foreign banks beginning this fall. To sort out the tangled mess, DAGR will be sponsoring a Tax Seminar at the end of May. Details TBA after the spring holiday break. It’s aimed at providing information for the self-filers as well as giving direction to those who need more professional help.
So you want to go it alone, DIY your tax return, OR just learn more by reading the instructions, the US IRS has a full catalogue of the essential materials. And don’t forget that certain taxpayers abroad, mostly in lower income categories, now have the ability to file their returns electronically.
To download US Tax forms and publications, visit IRS at:
Treasurer and Chair scrambled to put this one together. Enjoy!