US expats: don’t let the IRS put you in a bad mood this tax season

Sure, sorting through tax forms may not be a top priority for many US expats. But is it really worth putting things off when the result could be hefty penalties and huge administrative headaches?

US expats: don't let the IRS put you in a bad mood this tax season
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For many, filing tax US returns is an unpleasant and complicated task under the best of circumstances. And most often, filing from abroad doesn’t make things any easier.

Not only do different rules apply, but even the ‘regular’ rules work in different ways – and keeping track of everything is no easy task.

To help sort through the confusion, The Local has compiled a list of some common tax questions asked by US expat readers.

For answers, we turned to Ines Zemelman, founder and President of Taxes for Expats (TFX) who specializes in American expatriate taxes:

Q: Are there any changes to the tax code that will affect US taxpayers living abroad? Has the incoming administration made any tax promises specifically related to expats?

A: This is certainly a huge topic of discussion. While this is purely conjecture, much of the focus has been on consolidating tax rates into three tiers (from the current seven), elimination of the estate tax, and possible corporate tax changes.

One item that has been discussed but yet not clarified is the possible increase of the standard deduction in conjunction with elimination of personal exemptions. This combination would disadvantage families with children.

Click here to see how TFX can help you

For example, a married couple without children would see a decrease of taxable income by $10,000, while a couple with three children would have a $3,000 increase in taxable income. Currently families with children can deduct $33,000 through standard deductions and personal exemptions, whilst under the new rules they could only deduct $30,000.

Q: I’ve never filed an FBAR, should I be afraid to start? What happens if I keep putting it off?

A: There is absolutely nothing to be afraid of, except inaction. If you are behind on tax returns, FBARs, or other reporting requirements, the IRS has instituted a specific programme to help you get compliant with amnesty from penalties. Our advice is to get compliant ASAP, as the only real risk is that the IRS changes the programme that allows people to avoid penalties by coming clean now.

Q: What's the difference between FATCA and FBAR? What are the consequences of not filing them?

A: They are similar in that they are both informational forms that describe your non-US financial accounts and do not generate any tax due. FBAR is a stand-alone form submitted to the US Department of Treasury and has a minimum filing threshold of $10,000 at any point in time in aggregate across all non-US financial accounts. FATCA (Form 8938) is submitted to the IRS as part of your US tax return and carries higher thresholds which vary depending on your location and filing status. You can learn more here.

Q: Should I file using the Foreign Earned Income Exclusion or the Foreign Tax Credit?

A: If you have children living at home you should consider using the Foreign Tax Credit (FTC), which allows you to claim the child tax credit ($1,000 per child). This credit can’t be utilized using the Foreign Earned Income Exclusion (FEIE). For example – a family with three children living in Germany, and earning €80,000, can get a $3,000 US tax refund with the FTC, but with FEIE they get no refund.

Get more expert tax advice with TFX

For those earning more money, however, the FEIE allows you to exclude up to $100,000 of income, so this option can lead to a lower tax outcome with some financial engineering. It’s also important to bear in mind that, if you utilize FEIE, and then choose not to, you cannot utilize it again for five years, so planning ahead is key.

Of course, it’s always wise to consult with a qualified expat tax professional to help determine which option is best for you.

Q: I’m looking to sell the home I purchased abroad. What are the US tax implications?

A: The tax implications are the same as if you owned property in the US: selling property abroad is a reportable item and the income must be reported on your US tax return. There may also be capital gains tax if you make a gain on the sale, but there are mitigating factors in place that allow you to exclude up to $250,000 of gains if the house was your primary residence.

Don’t fear the IRS. Let TFX handle it

You should also keep all records of money spent on home improvement, which can help raise the cost basis of your home. And the purchase of a home is not a reportable item in the year when the purchase occurred, however purchase-related expenses will be accounted for at the time of property sale.

Q: I've left my job and am now self-employed and living abroad. What do I need to do differently when I file taxes in the US as someone who is self-employed?

A: The biggest difference is that self-employed individuals may be liable for SECA (Social Security and Medicare) taxes. If you live in a country that has a totalization agreement with the US then you have the option to just pay into one system. If you live in a country that does not have one then you may face double taxation as you are required to pay into the US Social Security system and result in a 15.4 percent tax hit.

Q: I haven't filed a US tax return in years. What are the risks if I start filing now?

There is always a risk of getting audited when filing a tax return (roughly 2 percent of returns are audited annually), however the bigger, and far more realistic risk is failure to file penalties and FBAR penalties if you are under investigation by the IRS. Once an examination is underway, you would be ineligible for the amnesty programmes discussed above and at risk for draconian penalties. We strongly recommend to utilize the IRS’ olive branch and get into compliance right away.

Q: My local, non-American bank asked me to tell them whether or not I am a US citizen. What are the risks of sharing or withholding this information with my bank?

A: If you are a US citizen with a non-US bank account, the ‘FATCA Letter’ from your bank may come sooner or later because the local banking regulators are cracking down on them. You can either provide them with the information they want (simply that you are a US citizen and that you are up to date on your US tax returns), or you can risk having them close your account.

Remember – FBAR and FATCA do not carry tax implications – they are simply informational forms declaring your non-US financial accounts so that governments can track the flow of money and prevent money laundering. It’s best to use the streamlined foreign offshore programmes to get compliant without fear of penalties.

Still have questions? Click here to register with TFX for expert tax advice for US expats.

This article was produced by The Local and sponsored by Taxes for Expats (TFX).

For members


EXPLAINED: Everything you need to know about Austria’s climate bonus payment

Residents in Austria will receive up to €200 to compensate for the increase in energy and fuel prices created by the eco-social tax reform. Here's what you need to know.

EXPLAINED: Everything you need to know about Austria's climate bonus payment

The climate bonus, or Klimabonus in German, is an essential part of Austria’s eco-tax reform, a larger project with several measures to incentivise environmental choices such as riding the public transport.

The bonus would offset some of the costs brought by a new CO2 tax in Austria.

READ ALSO: Austrian government unveils ‘eco’ tax reform

“With the Klimabonus, we ensure that climate-friendly behaviour is rewarded and the people in our country are relieved. If you take good care of the climate, you pay less CO2 tax and end up having more of this money left”, Climate Minister Leonore Gewessler (Greens) said on Twitter.

The Austrian government plans to set up a web site with more information on the bonus in June. Until then, here is what you need to know about the new compensation and how to get it.

Who is entitled to the payment?

Anyone who has had their primary residence in Austria for at least 183 days will be entitled to the bonus. Children are also entitled, but if they are younger than 18 years old, they will receive 50 per cent of the respective amount of the climate bonus.

READ ALSO: EXPLAINED: How to get your €500 Kurzarbeit bonus in Austria

“This is the first time that all people, regardless of age, place of residence, regardless of employment or pension or training status, have received a federal payment,” said Gewessler on Friday in the Ö1 broadcast.

What is this ‘respective amount’?

Not everyone will receive the same amount of money. The value changes depending on where the recipient lives and what is the offer of public transport there. Viennese, then, will receive the lowest amount of money: a one-off € 100 payment.

READ ALSO: EXPLAINED: How to claim your €200 voucher for electronics repair in Austria

There are four levels of payment depending on the municipality: €100 for urban centres with the highest-ranking development (which is only Vienna), €233 for urban centres with good development of public transport, €167 in centres and surrounding areas with good basic development of the public system, and € 200 for rural municipalities.

If you live in Austria’s second-largest city, Graz, you fall into the second category and should expect a €133 bonus.

Some exceptions to the geographical rule apply, so people with disabilities who cannot use public transport will receive the total climate bonus (€200) regardless of where they live.

The Federal Government had already stated it estimated that a third of Austria’s population would receive the highest bonus.

How to get the bonus?

The payment is pretty straightforward; there is no need to apply for it, and it will be done directly into your bank account, just make sure that you have it up to date on the FinanzOnline website – the final date to do so is June 30th.

Those who receive a pension and other benefits will receive the bonus in that same bank account.

READ ALSO: EXPLAINED: How freelancers in Austria can pay four times less in social insurance

It is worth mentioning that the bank account doesn’t necessarily need to be from an Austrian bank.

People who don’t have a registered bank account will receive a letter with a voucher that can be redeemed in shops or exchanged for cash at a bank, Gewessler said.

According to the Ministry, payments should start at the beginning of October, and those receiving a transfer will not have to wait for long to see the money in their bank accounts. However, people receiving letters with the vouchers could have to wait a few weeks.