Taxaholic Countries for Expats to Avoid

As if taxaholic France wasn't already in the news for the departure of Gerard Depardieu for more welcoming Russia, now comes a whopper!  More than 8,000 French households got tax bills for 2012 - dunned for taxes which exceed their income for the entire year.  Expect more departures from the no-longer-so-belle France.

We've mentioned countries with no personal income taxes.  Here's some horrible news about the EU: very few countries in the world tax like the EU.  Only Aruba, US, and Japan can rival Euro-kleptocrats. 

EU's worst:
Hungary - 59.4%
Belgium - 58.5
France - 56.4 (except for some, income taxes exceed 100% of income)
Germany - 54.6
Austria - 52.2
Netherlands - 50.2
Sweden - 49.4
Romania - 48.6
Italy - 46.0
Denmark - 45.7
Slovakia - 45.5
Lithuania - 45.4
Finland - 45.2

Only Cyprus (19.4%) and Malta (26.8%) have tax rates below 30%.  As we've all heard and read, Cyprus is broke, so it simply confiscated people's bank accounts.  That's Tax with a Capital T-plus!

What to do if your employer transfers you to one of these on an expat contract?  Try to find an alternative!  What if you're a citizen?  Do you want to be a milk cow for taxaholics?  Or do you want to enjoy the PT life?  You have a very potent incentive to be a non-resident citizen if you're from an EU country.

Think the grass is greener on the US side of the border?  People tend to think it "looks good" because charts like these only consider federal income taxes.  For the US, you have to add Social Security (FICA) and Medicare, which take another 7.65% from the first dollar you earn.  There's the new Medicare surcharge on top of that for those with higher-level incomes.  Don't forget state income taxes, which vary considerably.  Add it all up, and the US can turn out to the be the Ultimate Taxaholic for a lot of taxpayers.

If you are a US person (which includes more than citizens and legal permanent residents and workers on visas), non-resident status is no cure.  There's the Foreign Earned Income Exclusion, a small help to some.

Planning your travels, planning your expat-life, planning retirement relocation?  Whatever you do and wherever you go, tax planning must be a major consideration in the decision-making process for every Road Warrioress.

So, where are you headed?  What works well for you?  Share your thoughts.  We'd all love to hear them.

May your road rise to meet you!
Ann

IRS Tax Net Traps Non-US Citizens, Too

Taxes can be a big issue when living, working, traveling abroad.  US is probably the world's worst offender when it comes to tax traps.  US citizens are subject to US taxes on ALL income from EVERY source worldwide, whether they reside in the US or not.

US citizens are not the only ones trapped!  Tens of millions of foreigners - non-US citizens - get trapped every year.  Obviously, the legal permanent resident who holds a green card is trapped just as much as any US citizen, born or naturalized.  Green card holders often absent themselves from the US.  They're transferred to their employer's office in another country like any other expat, go home to tend to family matters, travel - whatever.  They still must file and pay exactly as any citizen must.

Some decide not to return to US, or get caught up in family issues and simply don't make it back to the US.  Too bad.  The green card is deemed abandoned and revoked one year from date of departure.  But if you want to avoid problems with IRS, when you depart the US, go to the US consulate, hand over your green card, and sign the form to revoke your legal permanent residency!  It's the only way out of the tax trap!

Work in the US?  Turn in that employment visa the minute you depart that job and return home.  Stop the tax clock from ticking as of last day of US employment.

Want to stay out of harm's way?  Never spend more than 180 days in the US within any one-year period.  E.g. if you are a Canadian Snow Bird in Florida for the winter, beware coming down "earlier" next year so you don't hit that 180-mark!  Beware coming for a month later in the year for a relative's wedding, road trip through the Rockies, or whatever.  Ditto if your boss frequently and/or lengthily ships you off to training, business meetings, sales conventions or what-have-you.

Some people can become subject to US taxes without ever setting foot in the US.  Remember Harry Potter and its author, JK Rowling?  The Second-Wealthiest Woman in the World earned tons of money in the US - royalties from her books, merchandising fees.  At her end of the income market, its pretty safe to assume she had experts to set things up properly, file her taxes, etc.  But recording artists, authors, stockholders, those who rent out their winter home or investment property - all kinds of people from around the world - can end up with US tax consequences.  They're trapped!

So when we talk here about taxes, especially US taxes, remember: You could be trapped in the IRS Tax Net!  Be careful.  Do not mess with the IRS.  They're broke, they know it, and they can get really, really mean trying to squeeze money out of you.

Keep it absolutely clear that you do not reside in the US, do not earn your income in the US, do not have investments or other US financial considerations.  Remain free!

May your road rise to meet you!
Ann

Remember FEIE Can Keep You Tax-Free

FEIE is a vital acronym for the US expatriate or Perpetual Traveler!  For 2013, the Foreign Earned Income Exclusion is up to US$97,600.  That's right, no US income tax on your first $97,600 of earned income if you reside outside the US.

It does not matter if the earnings come from your US employer or a company abroad.  If you live outside the US for at least 330 days per year, or have legal residency in a foreign country (e.g. an expat residing in a foreign country on an employment visa), a lot of your earnings are protected from the clutches of the IRS.

If you are lucky enough to live in a country without income taxes, or you are a PT residing here-a-bit, there-a-bit, outside taxation obligations, you can be free of onerous income taxes entirely.  If you reside where your foreign income is taxed, what you pay there may be credited to what you owe IRS if your income goes over the exclusion maximum.

FEIE only applies to earned income!  So interest, dividends, rental income, and other forms of unearned income remain subject to US taxes.

No exemption from filing!  Do be careful to file all your proper tax and other financial forms on time if you are a US citizen, legal permanent resident, or other "US person" subject to IRS reporting requirements.  IRS is quietly - but as deadly as a krait in the bamboo - going after expats.  Hey, the US is broke, so Taxman is as greedy as ever, just more desperate for your dollars (yen, rupees, Euros, and everything else).

Tax-time is always stress-time.  But FEIE can seriously reduce your pain.

May your road rise to meet you!
Ann

US Expats & PTs Exempt from Obamacare

Amid the discussions of "Obummercare," as so many commonly refer to this disastrous legislation, one fact rarely comes out.  Yes, some people are exempt from those requirements to buy and maintain pricy healthcare coverage: e.g. prisoners, illegal aliens, and members of Native American tribes. 

But take a good look at one more exemption: Americans who remain outside the US for a year!  US citizens who meet qualifications for the Foreign Earned Income Exclusion (FEIE) are also exempt from the insurance provisions of the Affordable Healthcare Act. 

What do you need to do to qualify for the health insurance exemption?  Do you have to actually claim FEIE on your US income tax return?  You only have to be qualified to take FEIE; you don't actually have to do it.  

If you are legally resident for a full tax year in another country, you are exempt from maintaining the US insurance. Likewise for Perpetual Travelers (or PTs): if you remain outside the US - physically present in another country or countries - for at least 330 days a year, you are exempt from this insurance requirement. 

Considering healthcare coverage in some countries costs less per year than a US policy costs per month, this is good news for expats, PTs, and long-haul travelers.  Considering healthcare costs in a number of countries is 20% or so of US costs, medical care abroad without health insurance (e.g. if insurance is not available) is cheaper than the copay under most US health insurance policies.

Healthcare and health insurance have all been rising dramatically since passage of the very-unaffordable "Affordable Healthcare Act."  Escape this tax and get better healthcare for less simply by living and/or traveling abroad.

Have fun long-haul traveling, and. . .

May your road rise to meet you!
Ann

IRS Adds Fuel to the Tax Fires

As if the FBAR form (TD F 90-22.1) weren't enough to drive US citizens, legal permanent residents, and other "US persons" crazy, there's also Form 8938 to add fuel to the IRS fires under your butt.  Since the rules keep changing, and Form 8938 is new anyway, American expats can go crazy trying to keep up with US tax laws and various IRS requirements. 

We talked in our last post about FBAR (Foreign Bank Account Report, which includes reporting all kinds of banking and other financial accounts).  If you have had any kind of financial account(s) which hit a total of US$10,000 at any time during the year, you need to file the FBAR.  Here's that link: http://www.irs.gov/pub/irs-pdf/f90221.pdf.  Get on it NOW because the IRS must receive it by June 30th.  Note that's the deadline for IRS to receive it, not for you to mail it out!

Now comes Son-of-FBAR, Form 8938.  Here you have to report all specified types of foreign assets, not just banking or other kinds of financial accounts (such as stock brokerage accounts).  http://www.irs.gov/pub/irs-pdf/f8938.pdf is the link to Form 8938.  For the instructions, go to: http://www.irs.gov/pub/irs-pdf/i8938.pdf.  Attach that form, if required, to your income tax return, and file it by the deadline for your income tax return.  If you are living abroad, your deadline for filing your income taxes is June 15th - this week!  If you filed for an extension, that deadline will be October 15th.

Gee whillikers - ain't the IRS sweet?  They even give you a comparison table of the requirements for the two different tax forms, financial assets vs. other foreign assets.  See the comparison table at: http://www.irs.gov/businesses/article/0,,id=255986,00.html. 

It's not just people we think of as expats who are caught in the IRS tax traps.  Many foreigners come to the US & give birth to get their baby US citizenship, then take baby home.  Well, guess what!  They have to file annual income tax returns, FBAR, Form 8938, etc, as required even if they were born in the US, then promptly departed and have never returned.  Even if they have dual citizenship.  Whatever.  Uncle Sam's minions at the IRS want your money!

Penalties are severe - and I do mean really severe - so check these out.  Don't risk making any mistakes on these two forms, in addition to routine income tax returns.  Not all American expats are subject to them, but be careful.  Very, very, very careful!

US Expats & PTs Beware: June 30th Deadline for FBAR

Expats and PTs are not the only ones who need to beware the dread FBAR report!  If you have any financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

United States persons are required to file an FBAR if:

1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

United States person means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

Exceptions to the FBAR reporting requirements can be found in the FBAR instructions. There are filing exceptions for the following United States persons or foreign financial accounts:

1. Certain foreign financial accounts jointly owned by spouses;
2. United States persons included in a consolidated FBAR;
3. Correspondent/nostro accounts;
4. Foreign financial accounts owned by a governmental entity;
5. Foreign financial accounts owned by an international financial institution;
6. IRA owners and beneficiaries;
7. Participants in and beneficiaries of tax-qualified retirement plans;
8. Certain individuals with signature authority over but no financial interest in a foreign financial account;
9. Trust beneficiaries; and
10. Foreign financial accounts maintained on a United States military banking facility.

Look to the FBAR instructions to determine eligibility for an exception and to review exception requirements.

A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on FBAR-related federal tax return or information return questions (for example, on Schedule B of Form 1040, the "Other Information" section of Form 1041, Schedule B of Form 1065, and Schedule N of Form 1120) and filing the FBAR, satisfies the account holder's reporting obligation.

The FBAR is not filed with the filer's federal income tax return. The granting by the IRS of an extension to file federal income tax returns does not extend the due date for filing an FBAR. You may not request an extension for filing the FBAR. The FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported.  File by mailing the FBAR to:

United States Department of the Treasury

P.O. Box 32621

Detroit, MI 48232-0621

If an express delivery service is used, file by mailing to:

IRS Enterprise Computing Center

ATTN: CTR Operations Mailroom, 4th Floor

985 Michigan Avenue

Detroit, MI 48226

Delivery messenger service contact telephone number: (313) 234-1062

Account holders who do not comply with the FBAR reporting requirements may be subject to civil penalties, criminal penalties, or both. 

On July 18, 2011, FinCEN announced that it has developed an electronic filing system that will accept the FBAR form.  E-filing is a quick and secure way for individuals to file FBARs.  Filers will receive an acknowledgement of each submission.  For more information about FBAR e-filing, read the FinCEN news release.

For more info from the IRS (in exceptionally byzantine fashion) see: http://www.irs.gov/businesses/small/article/0,,id=148849,00.html.  Note that the IRS is targeting expats and PTs in particular in search of your foreign bank and other accounts.  But all "US persons" with foreign bank accounts and other financial interests abroad are subject to FBAR.

US Expats & PTs May Benefit from Foreign Earned Income Exclusion

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income from all sources.  However, you may qualify to exclude from income up to an amount of your foreign earnings that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012). I n addition, you can exclude or deduct certain foreign housing amounts.

You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. Refer to Exclusion of Meals and Lodging in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 15-B, Employer's Tax Guide to Fringe Benefits for more information.

To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. A foreign country usually is any territory under the sovereignty of a government other than that of the United States.  The term "foreign country" does not include U.S. possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa.  This applies to the typical expat, living and working abroad for an extended period, with an employment visa or legal residency.

For PTs, you want to fulfill the physical presence test.  You meet the physical presence test if you are physically present in a foreign country or countries for at least 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and resident aliens.

The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad.

Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a "tax home" in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.

If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live.  If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work.

As usual, IRS regulations are byzantine.  For more info on the Foreign Earned Income Exclusion and housing exclusion from IRS, see:

http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html. 

It's Tax Time for American Expats & PTs

June 15^th is the IRS income tax filing deadline for Americans!  While the term PT usually stands for Perpetual Traveler or Prior Taxpayer, US citizens, legal permanent residents and other “US persons” (defined by IRS) are Permanent Taxpayers wherever they go.

If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the US on the regular due date of your return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15.

If you are unable to file your return by the automatic 2-month extension date, you can request an additional extension to October 15 by filing Form 4868 before the automatic 2-month extension date.  However, any tax due payments made after June 15 will be subject to both interest charges and failure to pay penalties.

If you are a U.S. citizen or resident alien (Green Card Holder) and you live in a foreign country, mail your U.S. tax return to:

Department of the Treasury

Internal Revenue Service Center

Austin, TX 73301-0215

Estimated tax payments should be mailed with form 1040-ES to:

Internal Revenue Service

P.O. Box 1300

Charlotte, NC 28201-1300

Taxpayers with an AGI (Adjusted Gross Income) of $57,000 or less can electronically file their tax return for free using freefile.  Taxpayers with an AGI greater than $57,000 can either use free fillable forms or efile via commercial software programs.  A limited number of companies provide software that can accommodate foreign addresses.  

Don't forget you may be subject to the Foreign Earned Income Exclusion!  There is one benefit for Americans living & working abroad.  See TravelTellers' next post.  More to come on US taxes and financial reporting for American expats. and PTs

Here are some links to IRS publications & tax forms:

Publication 54, Tax Guide for U.S. Citizens and Residents Abroad (PDF)

Publication 519, U.S. Tax Guide for Aliens (PDF)

Publication 4588, Basic Tax Guide for Green Card Holders: Understanding Your U.S. Tax Obligations (PDF)

Publication 4732, Federal Tax Information for U.S. Taxpayers Living Abroad (PDF)

For detailed info from the IRS see:

 http://www.irs.gov/businesses/small/international/article/0,,id=97324,00.html