The IRS expects overseas U.S. citizens to file tax returns every year, even if they don’t earn any money from the United States! That’s right, just being a citizen of the US means that you’re still subject to filing taxes on your worldwide income. Not only is it important for Americans living abroad to understand their obligations before an audit comes knocking on their door, but also because failing to file can result in harsh penalties and/or fines imposed by the IRS, and in some cases even jail time.
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1. What are the filing requirements for US Citizens living abroad
US Citizens living abroad are required to file a tax return, Report of Foreign Bank and Financial Account (FBAR), and Form 8938 if their foreign financial assets meet or exceed the filing requirement threshold. The amount varies per person depending on marital status, age, cost-of-living allowances, etc. Sometimes it’s necessary to consult with a professional when it comes to these issues, and if you live in Canada, googling “US Canadian tax accountants” will show you all available experts in the area, which might be the smartest choice if you are not familiar with tax laws. Essentially, it boils down to a filing requirement if your foreign financial assets combined with those of your spouse total a value higher than their respective reporting thresholds, which are as follows:
- Single individuals under 65 must file if their foreign financial assets are at least $200,000 USD. Married individuals do not have to file a tax return if their combined foreign financial assets are below $300,000 USD.
- Individuals over the age of 65 whose spouse is deceased or who is living apart from their spouse must file if their foreign financial assets are at least $400,000 USD. Married individuals do not have to file a tax return if their combined foreign financial assets are below $600,000 USD.
- Married couples filing together need to file only if the value of their combined foreign financial assets is at least 575,000 USD (half this amount if only one spouse is over the age of 65).
2. What are the penalties for not filing US tax returns as an American residing abroad?
The risk of being audited by the IRS is very high, especially for ex-pats who haven’t filed previous returns or didn’t meet their filing requirements. Failing to file your previous year’s returns also makes you subject to the failure-to-file penalty, which is usually 5% of your unpaid tax bill per month (max. 25%). The risk of being audited is even higher if you haven’t met your filing requirements in the past, in which case the penalty for failing to file FBAR and 8938 can be up to $10,000 USD per unreported account and year (yes, you heard that right: it’s a combined penalty!)! If the IRS decides to prosecute for tax evasion, your foreign assets could also become exposed, not just those in your name but also those of your spouse and any joint account you hold. These penalties add up very quickly and can be a serious threat to ex-pats who decide to ignore their filing requirements.
3. How do I prepare for an audit from the IRS?
Make sure you keep your records organized and accessible beforehand. This means having past returns, documentation of overseas income earned (such as pay stubs), etc., at hand in case you are asked. If you are found to be hiding foreign assets or accounts, not only will it cost you more money in penalties, but the possibility of criminal charges is also very high. It’s worth noting that any past transgressions can’t be undone by filing your returns for those years, they will still remain on your record and come back to haunt you. The safest option is to be honest and open with the IRS from the beginning.
4. Do US Citizens living abroad have to pay taxes on their income?
Yes, US Citizens are required to file income tax returns based on worldwide income, this includes earned, unearned, taxable, or nontaxable income (like capital gains, for example). They are also required to file a tax return if they meet the minimum filing requirement thresholds mentioned above. US Citizens who do not meet these requirements may face penalties and in some cases criminal charges (especially if they were found hiding assets and accounts from the IRS in an attempt to avoid paying taxes). The most important thing is that you should not lie to the IRS about your foreign income. In the case of earned income, US Citizens will have to file a 1040 tax return under either “single” or “married filing jointly” status. This is determined by whether they are married and their spouse is a US Citizen. In most cases, ex-pats who earn less than $100,000 USD will use the married filing separately status and those with higher earnings will be considered married filing jointly. Even if you don’t have any taxable income to report for a particular year, you still need to file your return and claim zero as your taxable income, otherwise, you may face penalties that can add up very quickly!
The US government wants to ensure that all of its citizens are paying the appropriate taxes for any income they may have earned while living abroad. It’s important to be aware of these regulations and take action accordingly if you’re a citizen who is filing overseas. Otherwise, the consequences can be very expensive! We hope you found this information helpful.