US Expats living and working in a foreign country tend to open bank accounts to effectively manage their finances. If they are living there for a longer time period, they mayalso decide to invest in a foreign pension plan or insurance policy. However, there’s a catch to that, as US Expats must dedicate considerable time to find out the tax ramifications of such actions. This is because such programs may lead the Expats to pay more taxes to the US government, than expected.
Mundane actions, such as being a participant of a foreign funded pension plan, can indeed create greater confusions for US alien residents residing abroad. Indeed, dealing with US tax complications is dreadful and tedious. Thus, it is important for US expats to be really well informed about the tax filing process, its requirements, and due dates. At the same time, it is equally important for them to beware of the tax traps due to which they can lose huge sums of money in the form of penalties, interest, etc.
US Expats must definitely look at the various considerations well in advance of the due date. This helps in making sure they can file their tax returns without facing any complications.
- Host Country :
Not all US Expats abroad have to file tax the same way. There are different requirements laid down for Expats in difference countries. Thus, resident aliens must try to find out if their host country essentially has a tax treaty or a convention with the US. Such treaties usually have a huge hand in dictating the terms of tax filing, and in some cases, may also help in saving tax.
- Foreign Income Earned :
A substantial amount of income you earn in a foreign country can actually be exempted, or deducted from US taxes. Hence, it would be wise to check up on the exclusions you can benefit from for your foreign earned income.
- Foreign Bank Account Holdings :
Foreign Bank Account holdings, whether in the form of a bank account, brokerage account, mutual fund trust, pension plan, or insurance plan, all have to be reported to the FBAR if their combined value exceeds $10,000 at any point in time during the year. It doesn’t matter if these accounts don’t produce any taxable income; if they exceed the threshold, they have to be reported to the US Treasury Department.
- Rental earnings and dividends/interest from US assets :
US Expats may additionally be earning money from various sources in the US, such as rental income, dividends, and interest returns on investments. These will be taxed the same way they would have been taxed if the US Expat had been in the US.
- The state you belong to:
Your taxes will be filed according to the laws of the state that you lived in. You are obliged to pay a state tax return to your state. However, different states have different rules regarding tax filings. Not all the states allow exclusion on foreign earned income on your taxable income.
It is a good idea to have a proactive approach regarding tax filing, as it will help root out complications promptly. Feel free to contact us at Expat CPA in case you need any guidance regarding tax filing.