3 Tax Traps for American Expats

You need to review the year-end tax statement(s) you should have received from your school-employer along with bank statements and determine what 2013 Federal and possibly state tax forms you will have to file back in the U.S. For those lucky enough to actually make real money teaching; have deep roots abroad; or own schools, you may also need to comply with the requirements of the Foreign Bank Account Report (FBAR) and/or I.R.S. Form 8938 as part of the Foreign Account Tax Compliance Act (FACTA).

I know what you are thinking: 1) They are so far away, why would they come after little old me? or 2) I don't plan on going back to the US for a long while or even forever! and/or 3) What's the big deal? I'll deal with it when the time comes. But don't be an easy mark! Government tax authorities at the Federal and State level want to know what mischief you've been up to while teaching abroad and they are in a position to do more than just leave lumps of coal in your stocking.

The following is a very brief overview involving US/State Tax reporting obligations. Don't worry. I'll pretend I didn't hear about all of your beer-money gigs. I know what you did last summer.

How to Proceed

1. 1

   Do I have to file a US Tax Return?

   • Are you an American Citizen/Green Card Holder?
   • Are you under 65 and have made or will make over $9,750.00 in 2013?

   Then you will have to file a 2013 US Tax Return. End of story. I am amazed at the number of ESL teachers, both newbies and veterans, who stubbornly believe in the persistent myth that since they made their money overseas, they don't have to file a US tax return. Wrong! Wrong! Wrong! The IRS doesn't care where you make your money. Income is income is income.

   If you have been living and working overseas without filing tax returns for previous years, I strongly recommend that you file amended returns for these missing years, especially if you were filing returns while living in U.S. If and when you come back home, somebody will notice that you have disappeared and reappeared.

   One nice thing about teaching overseas is that most of us will qualify for tax exclusions, but only if we file a return. Although you are taxed on your worldwide income, because of tax treaties with other countries, you may qualify to exclude from income tax up to $95,100 of your foreign earnings.

   To claim the foreign earned income exclusion, you must meet all three of the following requirements:

   • Your tax home must be in a foreign country; and
   • You must have foreign earned income; and
   • You must be one of the following:
     1. A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
     2. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
     3. A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
2. 2

   Do I have to file a State Tax Return?

   It depends on the state you claim as your domocile (which state you gresideh in the US). Look online at your state or residence tax agency website to find out.

   If your state requires you to file a return, don't ignore it. Unlike the Federal Government, States can't print money out of thin air, they need revenue! Living abroad already puts you on their radar, especially if you haven't filed previous returns. Don't look for sympathy from your fellow Americans, they already think you are crazy for living abroad and deserve to raked over the coals. Finally, I hope that for your sake you are not from California. California's Franchise Tax Board (FTB) is notorious for not being as forgiving as the IRS

3. 3

   Do I have to comply with the Foreign Bank Account Report (FBAR)?

   If you are a Yank that has deep roots in your current country, married to a native, own an ESL school, or are a highly paid fancy-pants university professor, you may have enough funds in foreign financial accounts to worry about having to comply with FBAR. Due-diligence is in order. There are big penalties for failing to timely file. FBAR really seems like bottom fishing by Feds. If you and/or your spouse are saving up for a car, house, or really nice vacation, it is very easy to be netted by FBAR. If you had more than $10,000 in your own and/or jointaccount on any day in 2013, you have to file a report with the Treasury Department. Under FBAR, even if 99.9% of the money in the foreign financial account belongs to your spouse, you still must report this account to the Treasury Department.

   Here are the general requirements:

   • Are you an American Citizen/Green Card Holder?
   • Did you have more than $10,000 in any foreign financial account at any time in 2013?
   • Are you a joint-signator on any foreign bank account that had more than $10,000 in any foreign financial account(s) at any time in 2013?
   • Do you have any foreign account that has non-monetary asset(s) i.e. insurance policies of more than $10,000?

   If you answered YES, then you have to comply with FBAR. Don't miss the efiling deadline in 2014, that's right, the form will now be electronic. There are no extensions! Let me repeat, if you share a joint account or have signature authority on any foreign financial account that had over $10,000.00 at any time in 2013, you need to file under FBAR. I have more bad news for you. If you could have answered YES to these questions for 2012 tax year, then you should have filed with the Treasury Department in 2013. If you have been naughty about complying with FBAR, you may want to google the 2012 OVDI (Offshore Voluntary Disclosure Initiative).

4. 4

   Do I have to comply with Form 8938, gStatement of Specified Foreign Financial Assetsh under the Foreign Account Tax Compliance Act (FACTA)?

   Americans possessing certain assets may be required to file an I.R.S. Form 8938 for the 2013 tax year. Starting in 2014, under FATCA, foreign banks will be required to report accounts owned by U.S. citizens directly to the IRS. Some overseas banks have been firing their American customers because they don't want to deal with being an errand boy for Uncle Sam.

   Here are the general requirements:

   • Are you an American Citizen/Green Card Holder?
   • Are you living "abroad" according to the requirements set by the IRS?
   • Do you have a "specified" foreign financial asset worth more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
   • You are filing a joint return and the value of your "specified" foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
   • Did you have an interest in the "specified" foreign financial asset which is above the threshold amount for taxable years starting after March 18, 2010?

Conclusion

I am not trying to scare you, but you need to take tax matters seriously. Living and working overseas is difficult enough without the additional stress of legal and tax issues back home. Perhaps you feel you're being treated unfairly and want to break free of the Empire. You can join the growing trend of Americans who are giving up their U.S. Passports by renouncing their citizenship. If there is enough interest, I will write an article in the future about how to renounce your US Citizenship. Warning: Spoiler Alert! It's a pain in the ass and potentially very expensive.

Further Information

Can't sleep? I have just the remedy. Caution: Don't read while driving or operating heavy machinery.

I.R.S. Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad: http://www.irs.gov/uac/Publication-54,-Tax-Guide-for-U.S.-Citizens-and-Resident-Aliens-Abroad-1

About

I am a semi-retired lawyer licensed to practice law in California, where I specialize in business litigation, estate planning, bankruptcy, and inserting Star Wars references into every discussion. One of my favorite pastimes is analyzing video footage involving the infamous Mos Eisley Cantina gincidenth to understand how in Tatooine did Greedo miss Han Solo at point blank range. I am taking a really long coffee break from my law office and currently reside in Japan where I work as an ESL Instructor at an International School.

Contact

If you would like more information about this topic or want to discuss your unique situation, please send your email to: [email protected] or the practitioner with whom you are regularly in contact.