I've lived in the UK for 8.5 years now and I only started filing my American taxes.
It all started when I first arrived in Scotland as a university student. After doing research, I understood that American expats were exempt from paying US taxes if they earned under a certain threshold. I ticked that off my expat to do list and continued building a life in the UK. Every few years I'd double check that I still fell into this category and would continue paying my UK taxes.
Only thing is - I was wrong.
All those years I worked in the UK, I should have been filing my US taxes even if I wasn't due to pay American taxes. When I found this out after clicking an H&R Block advert for American expats I broke out into a cold sweat envisioning being sent to prison Al Capone style - for tax evasion. But I didn't knowingly avoid my taxes AND I pay UK taxes. Did this mean I'd be fined hefty fines for my ignorance of the IRS rule book? Heart palpitations ensued until some specialist accountants started responding to my neurotic emails.
And that's when I found out that the US is one of only two countries in the world that comprehensively tax on worldwide income of its citizens and green card holders. FML.
But I wasn't the only American who also had these misunderstandings. Apparently it was a common enough misunderstanding that the IRS began a programme to get American expats back on track with their US tax filings. Last year I back filed my taxes and this year I filed my most recent tax return with the IRS - ahead of schedule. I no longer have dreams of me in an orange jumpsuit in Alcatraz. And I sleep like a freakin' sloth.
If you're planning to be or are an American expat, make sure you read the below interview with Ines Zemelman, Founder and President of Taxes For Expats to clarify some FAQs.
Why are American expats expected to file US taxes?
"First and foremost, it's the law. If you are a U.S. citizen or green card holder, you must report income from all sources within and outside of the U.S. It's that simple.
Whether or not you end up paying tax on that income is irrelevant - the income itself must be reported. There is a common misconception that you don't need to file if you earn under the Foreign Earned Income Exclusion (FEIE) - that is incorrect. Minimum filing thresholds vary by filing status; for example if you are single and earn over $10k you must file. If you are married to a non-US person and file separately, the threshold is $4k."
Who is required to file US taxes?
• "US citizens,
• green card holders and
• non-residents who are doing business in the US (i.e. Spanish citizen who owns a rental property in the US).
Note: The term "non-resident" does not refer to domicile but to US tax status. All US citizens are residents for tax purposes, regardless of where they live."
Can you explain what the Foreign Tax Credit means to American expats?
"If you paid income tax to a foreign tax authority, by claiming the Foreign Tax Credit (FTC), you are able to lower your US tax obligation and thereby preventing double taxation. If you are eligible for the child tax credit ($1,000 per child), utilising FTC instead of Foreign Earned Income Exclusion (FEIE) (as of 2016 the IRS no longer allows use of FEIE and the child tax credit in tandem) can be a far more optimal solution. In a working example, a working family of two with 3 children and earning $100k may receive a $3k refund if FTC is properly utilised, while they would break even with FEIE."
What happens if an American expat hasn't filed for years while an expat? What will happen to them? What would you suggest to them?
"Many expats and accidental Americans have recently found out about their requirement to file US tax returns and understandably there was a lot of confusion. Three years ago the IRS offered an olive branch - a streamlined foreign offshore amnesty programme. This programme allows you to only file tax returns for the last 3 years (even if you have not filed for 50) and FBARs for the last six, all while offering amnesty from draconian penalties."
If an American is married to a person who isn't an American citizen and both live abroad, is their household income taxed in the US or is only the American citizen's income taxed?
If you are married to a non-US person, you do not have to declare their income on your US tax return. In some instances you may choose to (for optimisation purposes), but you do not need to.
What files/information do American expats need to provide when filing back taxes? Is there an easy checklist?
"Unlike the US where tax documents are readily available (W-2, 1099, K-1, etc.), many foreign employers and taxing authorities do not provide an end of year summary. Please retain records of the following: your earnings (from all sources), housing expenses, taxes paid or withheld, pension or retirement distributions, and records of all non-US financial accounts for your FBAR (financial reporting requirements). Please visit here for a more in depth list."
How much do filing back taxes cost?
What will change for American expats as the new government administration plans to introduce US tax reforms?
At this juncture any discussion of proposed plans is still purely conjecture. The most 'newsworthy' discussions of late have focused on reduction of taxes with a rollback of Obamacare, as well as potential amendment of alternative minimum tax (AMT) (see news of Trump's 2005 tax return release). We discussed potential effects of Trump policies here.