The 2016 tax filing season has officially begun, and the IRS is now accepting returns from U.S. taxpayers worldwide. For U.S. citizens living abroad, filing taxes this year presents a number of unique and unprecedented challenges. To get you started down the right path, here are four things to be aware of as you enter this year’s tax filing season.
1) Hiding your head in the sand is an increasingly bad idea.
Given the millions of U.S. citizens living abroad and the significantly fewer number of tax returns filed by expats, it’s safe to assume that many of you who should be filing returns aren’t doing so. With each passing year, tax delinquency becomes a worse and worse idea, and 2016 is no different.
Since the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010, the IRS has made great strides in its global information-gathering capabilities. Toward the end of 2015, the U.S. signed several unprecedented international agreements regarding the digital exchange of information and began receiving massive amounts of overseas account information from FATCA partner countries. This could very well be the year your account information is sent to the audit-hungry IRS.
To make matters worse, aside from the onerous penalties associated with non-compliance, the IRS has added a new weapon this year for punishing tax-delinquent expats. Starting in 2016, if your tax delinquency reaches a $50,000 threshold (to be adjusted for inflation), you could potentially have your passport cancelled.
So if you haven’t been filing taxes, you should strongly consider one of the IRS’s amnesty programs. The friendlier of the programs, the Streamlined Procedures, offer non-willfully delinquent taxpayers the option to catch up with the IRS with limited penalties. When speaking recently about this program, IRS Commissioner John Koskinen suggested that the program will eventually be closed once the IRS determines that there's no way a taxpayer who would want to participate couldn't have heard about the process (rendering the taxpayer willfully delinquent by default).
2) Certain tax provisions have been adjusted for inflation.
Prior to each tax year, the IRS announces inflation adjustments for dozens of tax provisions, including the tax rate schedules, and other tax changes.
Of particular importance to U.S. expats, the following adjustments were announced for this season:
- For the 2015 tax return, the maximum foreign earned income exclusion (“FEIE”) rises to $100,800. Married couples working abroad can exclude twice this amount from their joint income (i.e., $201,600).
- The maximum foreign housing exclusion for the 2015 tax return rises to $14,112. Adjustments may vary from city to city and are based on the local cost of living.
3) The foreign tax credit, if available, is preferable for expat parents.
As an alternative to (and for higher income earners, in complement to) the FEIE and foreign housing exclusion, a U.S. expat can claim a foreign tax credit for foreign income taxes paid in order to reduce his or her taxable income.
Assuming sufficient credits are available (i.e., your creditable foreign tax exceeds your U.S. tax), U.S. expat parents should consider the foreign tax credit as the preferred alternative from now on, for the following reason: A new law specifies that taxpayers who utilize the FEIE cannot claim the child tax credit (which may be refundable up to an amount of $1,000 per child). This limitation does not apply, however, when the foreign tax credit is utilized. This new provision is effective beginning with the 2015 tax year.
4) Your filing deadlines are different.
Because April 15 falls on a Washington, D.C., holiday this year, the tax return deadline has been moved to Monday, April 18 for most filers. Expats should take into account that the shifted deadline also applies to international information forms that are normally due when the tax return is due. So, for instance, the deadline for the Form 3520 (relating to foreign trusts and gifts) is pushed to April 18 as well.
If you live outside the U.S. on April 18, you are entitled to an automatic extension (without the filing of an extension form) until June 15. If you owe tax, the extension applies only to the tax return filing and not the tax payment. You must still submit your payment by April 18 to avoid paying interest on your late payment (late payment penalties do not commence until June 15). You can also file an automatic extension to extend your deadline until October 17.
Joshua Ashman, CPA, is a U.S.-trained and licensed tax accountant and co-founder of Expat Tax Professionals. He specializes in the areas of international taxation and U.S. expatriate taxation, and has extensive experience with international compliance and U.S. expat tax returns.