Webinar OverviewHelping you piece togetherthe Expat tax puzzle
Helping you piece together the Expat tax puzzle The Most Important Things Every Expat or Soon to Be Expat needs to Know About US Taxes This presentation includes: •The two tests that decide if you can exclude up to $95,100 of your 2012 Income from US Taxation ($97,600 for 2013) •An explanation of the Foreign Earned Income Exclusion, Foreign Tax Credit and the Foreign Housing Credit •Why you probably don’t need to be afraid of the FBAR •An additional tax savings technique that could save you thousands of Dollars in tax each year •Some tips and advice on how to stay organized for tax time
Helping you piece together the Expat tax puzzle Physical Presence Test • Designed to give US Citizens or Resident Aliens who are outside the US a tax break if: • You are in a foreign country for 330 days in a 365 day period • Are legally in a foreign country – Cuba, North Korea etc don’t count • This can be for any 365 day period May to May, June to June etc and can start on any day of the month • Days within the USA – for any reason - don’t count, travel days don’t count towards the 330 day total • You can meet the test and still have a tax liability if you worked in the US for any of those days
Helping you piece together the Expat tax puzzle Bona Fide Residence Test • Designed to give US Citizens or Resident Aliens who live permanently outside the US a tax break if: • They have established residency in a foreign Country • Reside within that country for an entire calendar year • Plan to stay within that country indefinitely • For Example: • If you live in Costa Rica and you run a dive shop, you pay local taxes, have a residency permit and you are not planning on returning to the USA to live then you will probably qualify • If you are on a job contract for 22 months working in Mexico, then you probably won’t qualify as you would presumably return to the US at the end of the contract • A large part of this is based on future speculation so needs to be examined on a case by case basis so its best to speak to an expert about this
Helping you piece together the Expat tax puzzle Foreign Earned Income Exclusion = Save $95,100 per year! • FEIE AKA Form 2555 is a series of tax breaks for workers living abroad. • To qualify you need to meet either the • Physical Presence Test • Bona Fide Residence Test • Allows you to exclude up to $95,100 per year from your US taxes (for 2012). This is US Tax Free! If you are married and your spouse works then he/she can also exclude up to $95,100. This is also adjusted for inflation – the 2013 amount is $97,600! • Catches and snags • Need to pay Self-employment tax before the FEIE (may also owe Social Security) • If you work inside the US, you will still owe US tax on this money even if you are below the FEIE • Government employees including Armed Forces Exchange, Commissioned and non-commissioned officers messes, Armed forces motion pictures services, employees of kindergartens on armed forces installations do not qualify for the FEIE
Helping you piece together the Expat tax puzzle Foreign Tax Credit – Form 1116 • Dollar for Dollar tax credit to offset taxes paid to a foreign government on your US Taxes • 4 Criteria must be met to take the credit: • The tax must be assessed on Income • You must have a tax liability that has been paid or incurred • The tax must be imposed on you as an individual • The tax must have originated legally in a foreign Country • Limits • This is mainly for earned income – dividends, foreign gas extraction income, etc does not qualify • Must be reported in USD • Can not exceed the amount of US expat taxes that you pay on foreign sourced income – Total Foreign Sourced Taxable Income / Total Taxable Income before Exemptions) x Total US Tax = Foreign Sourced US Tax • Carrybacks and Carry forwards • If you are eligible for a foreign tax credit larger than you US income tax liability you can carry the credit back to the year immediately before the current year or you can carry it forward for up to 10 years to use on future domestic or Expat taxes
Helping you piece together the Expat tax puzzle Foreign Housing Credit • Total amount you are allowed to deduct is based on 30% the FEIE so this would be $95,100*.3= $28,530 for 2012, but • If you live in one of the 400 foreign locations which qualify for a higher deduction limit such as London - $83,400, Paris - $84,400, Singapore - $67,000 or Hong Kong - $114,300 you can deduct quite a bit more • You are allowed to deduct “qualified” housing expenses, such as: • Rent, Repairs, Utilities (excluding the telephone), Personal property Insurance, Leasing Fees, furniture rental, etc • Expenses that don’t qualify include: • Lavish or Extravagant expenses, mortgage payments, the cost of domestic labor, TV subscriptions, purchased furniture • Note that this is based on the total number of days you are in a foreign country so lets say you live in London and you spent 350 days in London last year and you can fully utilize the FEIE of $95,100 for 2012 • First you need to calculate your base amount, which is 16% of your FEIE so in this case .16x95100=$15,216 – think of that as the amount you would need to pay in the US. Now divide $15,216/350=$43.47, that is your cost per day • Next, lets say you live in London and your qualified housing expense is $83,400 or $238.28 per day • Now subtract $43.47 from $238.28 = $194.81 x 350 = $68,183.50 • That is the total amount of foreign housing expense you can take as the credit
Helping you piece together the Expat tax puzzleThe Report of Foreign Bank and Financial Accounts, FBAR/TDF90-22-1 • The FBAR worries a lot of people, but once you know the facts you don’t need to worry • The FBAR is a Treasury Form not an IRS Form, but the IRS is the watch dog • FBAR is due on June 30th each year and there are no extensions • You need to complete the FBAR if you have over $10,000 in all your foreign bank accounts including: Checking, Savings, Stocks and Bonds, if you control a foreign company or have signing authority over a foreign bank account you will likely need to file an FBAR • FBAR is designed to catch people who are laundering money or hiding assets overseas / Expats are just caught in the crossfire • So, If you are an expat with over $10k fill in the form and mail it to the Treasury. Make sure you have reported the income/capital gains on your US taxes • In our experience the IRS has been lenient on Expats and not hit people with fines. There is no telling how long that will continue so we recommend getting caught up as soon as possible.
Helping you piece together the Expat tax puzzle Tax Savings Currency Techniques • You need to report all foreign taxes paid in US dollars • The IRS prefers that each transaction be converted at the foreign exchange rate at the date of each transaction. But it’s preferred not required, so; • You should keep a record of when and how much you get paid, including bonuses – most employers have your salary and tax paid on your pay stub. You can look up the FX rates daily, monthly or yearly on the internet. • Tax savings tip – convert your income on a daily, monthly and yearly FX rate and see which is lower. You can then use this lower amount to convert your income to USD. I know guys who have saved over $5k per year doing this and it only takes maybe 30 minutes!
Helping you piece together the Expat tax puzzle Get and Stay Organized • Keep records of income – salary, bonus, interest, rents received, dividends, capital gains, etc. • Keep records of Expenses – house hold expenditures such as rent paid, utilities, etc.; foreign taxes paid or due to be paid; rental property expenses, etc. • Keep a detailed travel diary • Save your prior years tax return • Set up MailboxForwarding.com – They open and scan your mail for you so you can keep a digital record. This is much more efficient than having friends and family collect and send you your mail. We use this and its highly recommended!