As an expatriate American, whether you are sipping a sherry on Spain's Costa del Sol, hoisting a pint in an pub in Newcastle, or knocking down a tequila in Mexico's Riviera Maya, it is comforting to know that you are not forgotten back home in the U.S.A. Why is it that your Uncle Sam will remember you so easily? Because every year you must file a tax return with the I.R.S., wherever in the world you may live. Fortunately, for most taxpayers, filing abroad is merely a formality, as the first $91,500 of foreign earned income is excluded from their U.S. taxes and they get a credit for taxes paid to a foreign government. The danger is in failing to file and risk having the I.R.S. pursue you or even file for you. So lower your glass, pick up a pencil, and take note of what you will have to do to keep yourself in good standing with your uncle.
When You Have to File
The deadline for paying your U.S. taxes is April 15th, irregardless of whether you live in New York or New Dehli. However, if you are living overseas you automatically get an additional two months to file your return. Note the difference, any tax due must be paid by April 15th or you could potentially be charged interest. As with all taxpayers, expatriates have the option of filing Form 4868, giving them a six month extension, until October 15th, to file their return.
How You Get it Done
Again, little changes because of your location. You will file a Form 1040 along with any supplemental schedules. For expatriate taxpayers common supplemental schedules include the Form 2555, Foreign Earned Income, and the Form 1116, Foreign Tax Credit. The Form 2555 essentially means that, if you are a qualifying overseas taxpayer, you won't owe any U.S. tax on the first $91,500 (2010) of income that you earn from employment or from the operation of your business and the Form 1116 reduces your U.S. tax burden for taxes that you have already paid to a foreign government.
What Information You Will Need
If you are working overseas for a U.S.-based employer, then you will probably receive the same documentation that you would receive if you were based in the States. If you believe that you will not owe any U.S. tax because your income will meet the requirements of Form 2555 and will therefore not be taxable to the U.S. then it is your responsibility to inform your employer of this so that they will not be required to withhold estimated taxes on your income. Depending on your country of residence and any tax treaty it may have with the U.S., your employer will withhold payroll taxes just as if you were in the U.S.
On the other hand, if your employer is not a U.S. company then they are not subject to U.S. reporting requirements and will, most likely, provide you only with the documentation required for declarations to a foreign government. Some common issues are:
- documentation in a foreign language, possibly requiring translation.
- documentation reporting income not on a calendar year, meaning that you will have to do a little extra work to compute your income from January to December..
- income reported in a foreign currency, which must be converted to U.S. dollars for filing purposes.
If You Are Self-Employed
If you own your own business or are self-employed then you may want to finish that drink now, because it gets a little more complex. Basically, there are two ways to structure your business and each has its own tax consequences.
One way to do it, and probably the most common way, is to run your business through a foreign corporation. In that case, you are responsible for reporting the wages paid to you (as earned income therefore not subject to U.S. taxes if they meet the requirements of Form 2555) and the dividends (anything paid to you that wasn't a wage and therefore will be subject to U.S. taxes). The corporation is a foreign entity and does not have to file and owes no U.S. tax on its income; although you as the owner will have to report your interest it it on Form 5471.
The other possibility is just running your business as a sole-proprietor and not incorporating it. If your business is not incorporated then you will need to calculate your income and include it on Schedule C of your income tax return. The income can be excluded on Form 2555 just as income from employment, however it will be subject to self-employment taxes.
Give Me My Drink Back and Get Me Some Help
Most U.S. C.P.A.s and tax preparation services would either turn up heir noses in disgust or run away in fear if presented with the tax return of a U.S. expatriate. The fact is, it is a specialized service due to the many additional complications that come with filing abroad. The smart taxpayer makes certain that their provider has the necessary experience before beginning the process.