Most of us remember the good old days of the 1990s – a seemingly decisive victory in the First Persian Gulf War, the dot-com bubble that transformed computer geeks into nouveau riche millionaires, and a string of world championships that made the New York Yankees appear seemingly unbeatable. President Bill Clinton did a good job of manning the wheel during most of the decade, although truth be told, almost anyone can sail a ship when the seas are calm and a gentle but steady breeze is filling the sails.
Mr. Clinton did have his shortcomings, most notably his interaction with a certain intern which led to. . .well, we’ll skip all the sordid details. He was certainly not the first President to behave in such a manner, and he will not be the last one, but he was the only one to be caught in such a dramatic fashion. After he appeared before a federal grand jury, Mr. Clinton addressed the nation. Just as the camera zoomed in dramatically, the President issued his famous words of wisdom: “What I said was legally accurate, although I did not volunteer any information.”
The same can be said for your tax return, if you are a permanent expat or simply living abroad. The goal is an accurate, minimalist return. Just imagine that Philip Glass is your accountant, and you’ll get the idea. However, preparing an accurate and minimalist tax return is not an easy task.
Proper Documents
First and foremost, remember the proper filing deadline. U.S. citizens living abroad, whether or not they are in the military, get an automatic two-month extension to June 15, 2015. You need only include a statement with your return which states that you are living outside of the United States and Puerto Rico, and your main place of business, or post of duty, is outside the United States and Puerto Rico. Some of that language may not apply to you, but include it anyway, verbatim.
Every foreign return is different, but at a minimum, you’ll probably need to file these documents, in addition to your 1040 and any applicable schedules:
- Form 2555: Foreign Earned Income (you may be eligible for Form 2555-EZ instead),
- Form 1116: Foreign Tax Credit
- Form 8938: Statement of Specified Foreign Financial Assets
- FBAR: Report of Foreign Bank and Financial Accounts
The FBAR must be filed with the Treasury Department separately from your income tax return, and it can be submitted electronically here. There is a June 30 filing deadline, and there are no extensions.
Don’t forget your state returns. As a rule of thumb, New Mexico, California, Virginia and South Carolina make it very difficult, or even impossible, to terminate residency. New York and New Jersey typically do not require expats to file, if they lived outside the country for more than six months in the previous calendar year.
Crash Course in Tax Law
Please, PLEASE do not use this section, or any other part of this blog, to file your tax return. It is not a reference guide; it is intended only for general informational purposes.
In most cases, foreign income tax is a credit against your U.S. tax liability. Be aware that other forms of income, such as capital gains, may not be subject to foreign tax. Housing expenses may also be deductible, which may help lighten the load even more.
Expats qualify for the Foreign Earned Income Exclusion if they qualify as bona fide residents of another country for a period of time containing one entire tax year, they were physically absent from the United States for at least 330 out of any 365 days, or they resided in a foreign country that has an income tax treaty with the United States.
The Shadow Audit
Once you’ve prepared your return, you may want to consider a shadow audit. If you don’t know a former IRS auditor who will give your paperwork the once-over, reach out to me and I may be able to give you a few names.
If the shadow audit reveals any red flags, speak to a tax attorney before you file. It’s much better to err on the side of caution. If you decide not to change your return, for whatever reason, you’ll at least have a better understanding of the risk you’re taking.