Financial Obligations for U.S-Connected Persons Abroad

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Navigating the complex landscape of global taxation can be daunting for U.S. citizens and green card holders living abroad. Here’s an in-depth look at the critical obligations and requirements you should be aware of.

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U.S. Citizens

• Tax Obligations: U.S. citizens are subject to worldwide taxation and must file an annual tax return with the IRS, regardless of where they live. The Foreign Earned Income Exclusion (FEIE) allows qualifying expats to exclude up to $126,500 of their income earned abroad from U.S. taxes in 2024. (SmartAsset).
• Example: For instance, if a U.S. citizen earns $140,000 in Germany, they can apply the FEIE to exclude the first $126,500, leaving $13,500 subject to U.S. taxes.
• Penalties: Not accurately reporting global income can lead to severe penalties, including fines up to 75% of the unpaid taxes if fraud is involved. (IRS).
• Tax Details: When the FEIE is applied, the remaining income over the exclusion limit is taxed by U.S. standards. Assuming the $13,500 falls into the 24% tax bracket, the tax due would be approximately $3,240. However, taxes paid in the host country on that income may offset this through the Foreign Tax Credits, preventing double taxation. (IRS).

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U.S. Green Card Holders

• Tax Obligations: Like U.S. citizens, green card holders are taxed on their worldwide income and may face an exit tax if they renounce their residency. This exit tax is assessed if the individual’s net worth exceeds $2 million at the time of expatriation. (IRS).
• Example: A green card holder with a net worth of $2.5 million may face an exit tax if they decide to relinquish their green card. The tax would be calculated on the unrealized gains of their assets as if sold the day before expatriating.
• Penalties: Failure to comply with tax filings when renouncing green card status can lead to significant penalties, including fines and continued U.S. tax liabilities.
• Tax Details: When a U.S. green card holder with a net worth over $2 million renounces their status, they may face an exit tax, calculated as if all assets were sold the day before expatriation. The first $767,000 of gain is exempt from this tax. Compliance requires filing IRS Form 8854 to verify tax obligations have been met for the past five years. Failure to file correctly can lead to severe penalties. Proper tax planning with a specialized advisor is essential to minimize potential liabilities and manage future tax obligations effectively. (IRS) (IRS).

U.S. Accounts

• U.S. Pensions (401ks, IRAs): Distributions are taxable in both the U.S. and potentially the resident country unless specific treaty protections apply. Proper reporting and awareness of treaty benefits are crucial to avoid double taxation. (Greenback Expat Tax Services).
• Health Savings Accounts (HSAs): HSAs do not receive favourable tax treatment abroad, and distributions may be taxed by the resident country.(SmartAsset).
• U.S. Bank Accounts: You must report foreign accounts if the total exceeds $10,000 at any time during the year to avoid severe penalties including fines up to $100,000 or 50% of the account balances for wilful violations. This reporting falls under FBAR and FATCA requirements. (IRS).
• U.S. Investment Accounts: Investments in non-U.S. mutual funds and ETFs classified as PFICs (Passive Foreign Investment Companies) can incur higher taxes and require complex reporting. (SmartAsset).

Key Dates and Deadlines

• U.S. Tax Returns: Typically, due on April 15, but if you're a U.S. citizen or resident alien living abroad, you're granted an automatic two-month extension to file your return and pay any amount due without requesting an extension. This pushes the deadline to June 15. However, interest will still be charged on payments made after April 15.
• FBAR (Foreign Bank and Financial Accounts Report): U.S. persons must file an FBAR (FinCEN Form 114) by April 15, with an automatic extension to October 15.

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Practical Steps

Filing U.S. Tax Returns

• Before April 15: Gather all necessary documents including proof of income (Form W-2, Form 1099, or foreign equivalent), records of any foreign taxes paid, and details of your FEIE claim.
• Claim FEIE: Use IRS Form 2555 to claim the Foreign Earned Income Exclusion. This form helps exclude up to $126,500 of your foreign earnings in 2024.
• Report Worldwide Income: Ensure all worldwide income is reported, including any income above the FEIE limit.
• Foreign Tax Credits: If applicable, claim the Foreign Tax Credit on Form 1116 to offset U.S. taxes on the remaining income not covered by the FEIE.

• File U.S. Tax Return: Consult with professionals, report worldwide income, and claim applicable exclusions and credits.

Filing Foreign Tax Returns

• Gather Documents: Collect all relevant documentation regarding your income in your country of residence, including employment income, rental income, and possibly income from other sources.
• Engage a Tax Advisor: Given the complexities of local tax systems, consider engaging a local tax advisor to ensure proper filing and maximize potential deductions and credits.
• Use Double Taxation Treaties: Apply the provisions of any applicable U.S. double taxation treaties to prevent being taxed twice on the same income. Your advisor can help you understand how to effectively apply these rules.

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Managing FBAR and FATCA Requirements

• Determine Reporting Thresholds: Confirm if your foreign financial accounts exceed the $10,000 threshold at any time during the calendar year, necessitating an FBAR filing. Check if your total foreign assets exceed the FATCA reporting thresholds applicable to your filing status.
• Prepare and File FBAR: Use the BSA E-Filing System to report your foreign accounts by the April 15 deadline, with an extension available until October 15.
• File Form 8938 if Necessary: If your assets surpass the FATCA thresholds, include Form 8938 with your federal tax return to report specified foreign financial assets.

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