US taxation of Americans overseas
As a general rule, if you were either born in the United States or one of your parents is American you will be considered by the US tax authorities (IRS) a US tax resident and subject to yearly US tax obligations.
The US tax system: citizenship based
There are 2 main taxation systems in the world: (1) a territorial system - where only income generated inside the country is taxed and (2) a residence-based system - where residents of the country are taxed on their worldwide.
The US does not follow any of these 2 systems (!). Instead the US applies a citizenship based system – where both US based citizens and non-US based citizens are taxed on their worldwide income. What this means is: if you hold a US passport of a permanent resident visa (green card) you are subject to the US taxation rules wherever you live in the world.
How does the US collect your foreign information?
The Bank Secrecy Act (1970)
In 1970, Congress passed the BSA law that requires financial institutions to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of transactions of more than $10,000 and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
The Financial Crimes and Enforcement Network (Fincen) (1990)
In 1990, the Secretary of the Treasury established Fincen with the mission to collect and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.
To read more on Fincen - https://www.fincen.gov/
The Intergovernmental Agreements
In recent years, the US Treasury has actively engaged with over 50 countries to enter into Intergovernmental Agreements (IGAs). The IGAs facilitates the exchange of tax information between countries to improve international tax compliance.
To read ore on countries with IGA: https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx
The Foreign Account Tax Compliance Act (FATCA) (2010)
In 2010, Congress passed FATCA requiring all non-U.S. financial institutions to report the assets and identities of foreign persons to the US. FATCA also requires foreign persons to self-report their non-U.S. financial assets annually to the IRS.
To read more on FATCA: https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca
As a result of the above, banks around the world have been scrutinizing their customers in an effort to become compliant with US legislation and have agreed to report to the US authorities customers who are "US persons”.
Reporting worldwide income
As an American overseas, you must file each year a US Income Tax Return (Form 1040) and report income from all sources within and outside of the U.S. This is true whether or not you receive a form W-2 (for wages) or a form 1099 (for miscellaneous income). Your foreign income will be subject to the same tax rates as your US income: the IRS applies the same marginal tax rates for both foreign and US Income and for both US based and overseas based US citizens.
To view the US tax rates: https://www.kbfinancials.biz/tax-rates.html
Reporting worldwide assets
As an American overseas, you must file each year a Report of Foreign Bank and Financial Accounts (Fincen114) and report the accounts for which you have a financial interest over (ownership or signature) - such as a bank account, a savings account, and investment portfolio - if the aggregate balance of all the accounts exceeds $10,000 anytime during the year. There is no tax due when filing the report, but there are penalties for not filing the report on time.
More information on reporting foreign assets: https://www.kbfinancials.biz/report-your-foreign-assets.html
Claiming the foreign tax credits & exemptions
Reporting worldwide income & assets on your US tax return does not always mean that you will pay more taxes. The foreign tax credits & exemptions might be available to you to offset your international tax burden.
Foreign earned Income exclusion ($103,900 in 2018)
You may be able to exclude part of your foreign earned income from your US tax. To qualify for the exclusion, you must have (1) foreign earned income (such as wages), (2) be a US citizen who resides in the foreign country for a least one full tax year (bona fide resident test) or be physically present in the foreign country for at least 330 days during any consecutive 12 month period (physical presence test) and (3) have a tax home in a foreign country (with no abode in the US).
Foreign tax credit
Tax you owe on foreign income can be substantially reduced if you have already been taxed on this same income in your foreign country of residence. The tax credit is calculated as a prorata by comparing the portion of your income that is from foreign sources and your total worldwide income. Any unused portion of the foreign tax credit is carried back one year or forward 10 years.
Income Tax treaty exemptions
You may be entitled to a reduced tax rate or even an exemption from US tax, if a tax treaty allows for it. The US has signed treaties with more than 90 countries. Tax treaties exist between countries (1) to prevent double taxation, (2) to provide for reduced tax rates (for example on dividends & interest) and (3) to provide "tie breaker" clauses for resolving conflicts between residency rules.
To view the list of tax treaties with the US: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z
Social Security tax exemptions
The US has entered into agreements (Totalization agreements) with foreign countries to avoid foreign workers from being subject to dual social security taxes. Under these treaties, you only pay social security taxes in one country (usually the country where you are working). To qualify for the exemption, your employer must get a certificate of coverage from the office of international programs at the Social Security Administration.
As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a professional. Contact Karine Bauer EA at Kbauer Financials LLC for advice on your specific tax situation. Karine Bauer, EA is an Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. She is an experienced tax professional with more than 20 years of international experience.
Updated on June 21st , 2019