Daily LifeExpat Tax Info

By Barron Harper
www.taxbarron.com

Also by Barron Harper:
Qualifying for Foreign Earned Income Exclusion and Economic Stimulus
Report of Foreign Bank and Financial Accounts

As the spirit of another Christmas and New Years celebrations begins to recede, Americans living abroad will be reluctantly thinking about their tax filing obligations. As residents of a foreign country, they will have to report and pay taxes on their world-wide income to the tax authority. But as U.S. citizens or deemed U.S. residents, they are also obliged to report world-wide income to the Internal Revenue Service (IRS). And without due diligence in how to go about reporting that income, they could end up paying taxes stateside in spite of a double taxation treaty.

The first essential is to understand whether there is a filing requirement since anyone receiving earnings below a certain threshold are not obliged to file. This threshold is merely the combination of two categories: exemptions and standard deduction (or itemized deductions). Hence anyone receiving income below the following amounts need not file:

Single: $8,750
Over 65: 10,050
Head of Household: 11,250
Over 65: 12,550
Qualifying widow(er): 14,100
Over 65: 15,150
Married filing jointly: 17,500
1 spouse over 65: 18,550
both spouses over 65: 19,600
Married filing separately: 3,400

Anyone receiving income above the applicable threshold amount must therefore file a tax return. Foreign earned income (wages, salaries, self-employment) must also be included in this filing.

To reduce the chances of double taxation, IRS allows that a foreign earned income credit be applied against foreign earnings; $87,500 in 2007. Foreign earnings above this threshold are taxable stateside, but the US tax may be offset by a foreign tax credit (FTC) applied against taxes paid to the foreign country of residence. In fact, the FTC is available on any income taxes paid abroad. The rub is that the FTC does not always offset US taxes.

Certain penalties apply for failing to comply with US tax laws. IRS assesses penalties at 5% a month against any unpaid taxes up to 25%. In cases where fraud is deemed to have been committed – for instance, in failing to report foreign earned income – IRS can assess 75% while denying the taxpayer the foreign earned income exclusion. It may also seek criminal penalties for not reporting foreign earnings, in which case the taxpayer could face jail time. Americans are also obliged to file information returns on investments in foreign corporations, in foreign partnerships and in foreign accounts, or risk very severe penalties.

The due date for filing tax and information returns is 16 June 2008 (15 October by filing Form 4868). However any taxes due for 2007 must be paid by 15 April along with first quarter 2008 estimated taxes.

Any US citizen or deemed resident living abroad who has not filed a tax return for some years should promptly do so as an offensive position is always better that a defensive one. IRS is actively increasing its powers of audit in order to catch non-compliers. Generally the revenue service will only require the last three years tax returns be filed.

Related Link:
Expat Tax Services