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Guideline for Filing U.S. Tax Returns When Residing Outside of the United States


One of the major issues that faces anyone when moving out of the country and becoming an expatriate is the filing of U.S. tax returns. Numerous U.S. citizens and lawful permanent residents (Green Card Holders) move to a foreign country and forget or choose not to file a tax return.

The U.S. requires an accounting based on worldwide taxable income when residing in or outside the United States. This could become a major issue if a person chooses not to file their tax return. The statute of limitations never runs out. Therefore, if you live abroad for ten (10) years and then return to the United States, the penalties and interest may exceed the actual tax.

However, a U.S. Citizen or Resident Alien need not file a tax return unless the gross income equals or exceeds certain minimum amounts. For 2006, that amount is $16,900 for a married couple filing a joint return. If one spouse is over 65 years of age then the amount is $17,900. If both spouses are over 65 years of age then the amount is $18,900. The amount for a single individual is $8,450, or if the single individual is over the age of 65 years than the amount is $9,700. The amount for a head of household is $10,850. If the head of household is over the age of 65 years then the amount is $12,100. The amount for a qualifying widow or widower is $13,600. Other things to remember are if you have W-2 income withholding tax, or self employed income where self-employment tax is due.

Even if required to file a return, the foreign earned income exclusion and housing exclusion and deduction, currently for 2006 up to the amount of $82,400 and living expenses in excess of $34 per day respectively, plus the foreign tax credit, could reduce or eliminate the U.S. tax liability. If married and you both earn income, each of you can exclude up to the amount of $82,400.

If you are self-employed and no foreign social security is being withheld from your earnings you must file a Schedule C with your U.S. Tax Return and pay U.S. self employment tax on your net earnings after deducting your expense. The self-
employment tax is 15.3% and is not reduced by the foreign earned income exclusion or foreign tax credits.

If you own more than a 10% ownership in a foreign corporation you are required to file a special form reporting that interest. If making a profit, it will be a “controlled foreign corporation” and you could owe U.S. tax on its earnings.

If you are a beneficiary or trustee of a foreign trust (i.e., Fideicomiso in Mexico), or have a bank account with a balance over $10,000, you must file a special form.

Failure to file any of these forms can result in penalties up to $10,000 or more and can be assessed many years from now when the U.S., IRS and Mexican Hacienda finally start sharing more information. You can also be liable for individual state income taxes.

Code Section 911 dictates the deductions from gross income and also the foreign housing costs paid on behalf of or housing costs paid by the individual that are in excess of a base amount. These items need to be filed on Form 2555 or 2555 EZ. A very important item is that the Internal Revenue Service has tried to explain the necessity to file even if the income earned is less than the excludable amount.

Code Section 901 allows U.S. Citizens and long-term permanent residents to take a credit for taxes paid to a foreign government. This is reported on Form 1116. Almost 50% of individuals filing show no tax liability because of the two codes, Sections 901 and 911.

Expatriates who have a net worth of $500,000 or more (adjusted for inflation) and have a net average annual net income tax liability of $100,000 or more for the five years preceding expatriation are subject to this tax. All expatriates who are subject to this tax under the code has to submit a statement of residence and citizenship and a statement of assets and liabilities.

They have created Form 2555EZ to simplify filing and revised Publication 593, tax highlights for U.S. Citizens and Residents going abroad to encourage taxpayers to file.

In summary, the United States taxes its citizens on their worldwide income regardless where they live. The end result might be zero tax but there is a definite requirement to file a tax return.

Click to download PDF documentInternational Tax Planning White Paper

Maurice M. Glazer
Glazer Financial Network

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