28 Aug Probate Executor Lawyer Argentina
Probate Executor Lawyer Argentina
New Rules for Obtaining an ITIN
The procedures for obtaining an ITIN have recently been tightened by the IRS.
Basically, an ITIN (Individual Tax Identification Number) is issued only to persons who actually need one, such as a non-US spouse of a US person who is filing US tax forms with their spouse on a joint return or for non-US dependents. These are persons who need a number for US tax purposes but who cannot obtain a US Social Security Number. If you do not have an ITIN for your non-US spouse, you can attach form W-7 to your US tax return. Members of the US military serving abroad should be able to obtain an ITIN for their spouse under the old, more relaxed, rules. Note that ITIN’s are valid for five years only, after which time a new one will have to be requested.
U.S. Taxes Abroad for Dummies
You’re a US citizen or a green card holder and you live somewhere outside the USA (i.e. in a “foreign” country).
Additionally, there are US tax filing obligations if you have personal income such as wages, salary, commissions, tips, consultancy fees, pension fund, alimony, US or foreign social security, interest, dividends, capital gains, rental property, farm income, royalties, inheritance or payment in kind in the US or abroad.
Moreover, you are subject to US tax filing obligations even if you haven’t been to the USA or left several years ago and all your income is from “foreign” sources.
In fact, US tax filing obligations apply even if some or all of your income was already taxed at source or is going to be taxed by a foreign country.
Last, you may have US tax filing obligations even if you aren’t earning any money but are married to someone who did have income.
Basically, you have to file an IRS Form 1040 for the previous year if your income was above a certain threshold. These thresholds are the same as for US residents.
Under 65 65 or older
Single Individual (unmarried) $10,000 $11,500
Married couple filing jointly $20,000 $21,200
Married individual filing separately $3,900 3,900
Filing as “Head of household” $12,850 $14,350
Widow or widower $16,100 $17,300
How does living abroad mitigate my US tax?
There are basically two methods by which you can reduce your US tax by a substantial amount. These are the “Foreign Earned Income Exclusion” and the “Foreign Tax Credit.” However, neither of these methods excuses you from filing if your income was above the filing threshold.
The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) allows you to exclude a certain amount of your EARNED income from US tax. The exclusion only applies to earned income. Other income, such as pensions, interest, dividends, capital gains, etc., cannot be excluded with the FEIE.
Here’s a simple example. Suppose you live in France and you earned the equivalent of $150,000 (about EURO 110,000) from your French employer. You are married filing jointly, have two children and you take the standard deduction.
The US tax on this income is calculated as follows:
US tax on $150,000 : $22,408
Subtract US tax on $97,600 (the exclusion): $ 9,578
Net US tax payable: $12,830
While this is only an approximate calculation, it gives you an idea of how the system works.
Foreign Tax Credit
The other method for reducing your US tax bill is the foreign tax credit, using IRS Form 1116. If your income was taxed by a foreign country, you can subtract that tax from your US tax, in most cases substantially reducing your US tax bill. But be careful, you cannot claim a foreign tax credit for foreign taxes on income excluded on Form 2555. In other words, you can only claim a foreign tax credit for foreign taxes on the same income that the US is taxing. The fraction of your foreign taxes that can be taken as a tax credit is determined by the ratio of excluded income to total income. Here’s an example, using the same figures as above.
French taxes on $150,000 (EURO 110,000) are EURO 14,567: $19,936
Fraction for excluded income ($97,600/$150,000) : 0.65
Fraction of foreign taxes that can be taken as credit: 0.35
Net French tax that can be taken as credit (0.35 x $19,936): $6,977
In this particular example, you would actually be better off by just using the foreign tax credit alone and not even claiming the FEIE. If you do this you would only have to pay $2,472 in US taxes ($22,408 minus $19,936).
So you see that by judiciously combining the FEIE with the foreign tax credit or by applying only the foreign tax credit you can substantially reduce or even get your US tax bill down to zero. Again, this is only an approximate calculation to serve as an example of how the system works.
In some cases, you can exclude qualified housing expenses from your taxable income as well.
Other aspects to consider when figuring your US taxes
Among these are the handling of un-earned (passive) income such as interest and capital gains, the foreign housing exclusion if you rent your lodging, earnings of a non-US spouse, business expenses, possibility of itemizing deductions instead of applying the standard deduction, etc., etc.. However, they go beyond the simple explanation that this article is intended to be. Self-employment taxes (for Social Security and Medicare) can apply if your net annual earnings exceed $400 and you live in a country which doesn’t have a social security “totalization” agreement with the US. If you need to consider any of these elements, you would be well-advised to consult an international tax expert.
Foreign bank accounts
The US government does not tax wealth as such. However, the IRS still wants to know about money in foreign bank accounts. Especially how it got there and if it produced any income such as interest.
Unfortunately, due to recent legislation, there are two different reporting requirements for foreign bank accounts. These are the “FBAR” and “FATCA” respectively.
The FBAR (Foreign Bank Account Report) has been around since 1972. Also, it should be filed if your aggregate foreign holdings sum up to $10,000. Or more at any time during the tax year. Also, if you just have signature authority over a foreign account exceeding $10,000. For example, if you are the treasurer of an association or work in the accounting department of your employer and sign for payments. It must be filed by June 30th each year.
Parallel to that is FATCA (Foreign Account Tax Compliance Act) . This should be filed if your aggregate foreign holdings sum up to $50,000 and you reside in the United States. If you live abroad, higher thresholds apply: unmarried – $200,000 at year-end or $300,000 during the year; married filing jointly – $400,000 at year-end or $600,000 during the year; married filing separately – $200,000 at year-end or $300,000 during the year. The FATCA report is Form 8938 filed each year with Form 1040 (if applicable).
If your foreign bank account holdings exceed the threshold for one or both of these reporting requirements, you should consult an international tax expert.
Tips for U.S. Taxpayers with Foreign Income
It is important that you remain current in your US tax filing obligations. Under FATCA, foreign banks are required to report to the IRS, either directly or indirectly, information on all accounts owned by US persons. If the IRS learns that you have foreign bank accounts before you file for your US taxes and FBAR, you are in deep trouble. Penalties are steep.
About the Taxpayer Advocate Service
The IRS highlights the services of the Taxpayer Advocate in its Tax Tips: “Ten Things to Know about the Taxpayer Advocate Service.”