US taxation abroad

The United States of America  – A nation of Forms, Penalties and Bureaucracy

The U.S. requires that you file a great deal of “paper work” whether you owe tax or not. Basically U.S. citizens, Green Card holders and those who spend too much time in the U.S. must pay tax on their world income and must file information returns. The U.S. and the African nation of Eritrea are the only two nations in the world that use a system of citizenship-based taxation.

What you need to understand – The general principles

1. As a US person you are subject to the US tax system wherever you live in the world.

2. Your US tax is determined (with one exception) as though you lived in the US. This means that the US will simply pretend that you live in the US and treat you accordingly. All of your income in foreign currency must be converted two US dollars. All of the bank and/or brokerage accounts in your country of residence are considered to be “foreign”.

The one exception is that as a resident of another country you are allowed to exclude a certain amount of “earned income” from your tax return. This exclusion is called the “Foreign Earned Income Exclusion” or “FEIE” for short.

Like all US taxpayers, you may be eligible for certain “tax credits” based on taxes paid to other countries.

Finally, the US has various tax treaties with different various countries. Some aspects of “international taxation” are affected by the terms of those treaties.

The IRS has not been helpful to US citizens abroad. Those who have the time, might be interested in IRS Publication 54 which is titled:

“Tax Guide For US Citizens and Resident Aliens Abroad”

Please note also that you may be subject to taxes in various states as well.

Tax Return:

This is a statement of your income. For individuals, this is your 1040. In addition, the basic tax return may have numerous schedules.

Information Returns:

This is a disclosure of information. The most common is your FBAR (Foreign Bank Account Report). But, there are many, many others.

The penalties for failure to file these returns can be very very severe.

Leave a Reply

Your email address will not be published.