Personal Finance

American expats, beware these tax filing traps

For American expats, tax season is even more cumbersome than the homegrown variety.

For starters, there's a bunch of extra reporting and filing requirements from the IRS in addition to merely filing your return. These additional steps are intended to deter foreign bank account holders from hiding cash offshore and evading taxes.

Some 9 million U.S. citizens live overseas, according to the U.S. State Department. This year, like their domestic counterparts, they have until April 18 to file an income tax return. They can get an automatic extension up until June 15, but any taxes owed still have to be paid by the April 18 deadline.

Taxing questions
Taxing questions

Respect the forms

"People come to me all the time with their common sense hat on: How much do I owe?" said Christopher J. Byrne, a partner at UHY LLP in New York.

"But the thing that's more important is the informational forms, including the foreign bank and financial accounts report," he said. "These forms are penalty-sensitive, and if they get overlooked, it's hard to dig yourself out."

Here's what expats need to do to make sure they don't draw the ire of the taxman.

The IRS doesn't look kindly upon those who fail to report all of their foreign bank accounts.

You are required to file a report of foreign bank and financial accounts (or FBAR) if you had an interest in or signature authority over at least one account outside the U.S. and the aggregate value of all of your foreign accounts exceeded $10,000 at any time in the year.

You must also file Form 8938, a statement of specified foreign financial assets.

It'll cost you if you skip the FBAR. You could be on the hook for a penalty as high as $10,000 for nonwillful violations. Those who knowingly flout the requirement may be charged a penalty of $100,000 or 50 percent of the balance in the account.

How to report foreign income

The foreign earned income exclusion allows expats to exclude some of the money they've made abroad. For the 2016 tax year, you can exclude a maximum of $101,300.

Even if you earn less than this amount, you still have to file a return, said Brent Lipschultz, a partner specializing in high net worth clients at PricewaterhouseCoopers in New York.

If you haven't reported past foreign earned income, the IRS gives you a chance to come clean, provided you didn't deliberately skip filing.

This means you'll have to submit returns for the last three years. You must also file a FBAR for each of the last six years, if you had failed to do so. Naturally, you'll have to pay any back taxes owed, plus interest, when you turn in these documents.

"The big issue is that you must be nonwillful in your failure to file," Lipschultz said. "There's case law, but it's a challenge to know whether a client is willful or nonwillful."

No double dipping

Claiming the foreign earned income exclusion can also affect your eligibility for other credits.

For instance, you can't claim a foreign tax credit on the same income that you've excluded. It's one or the other, said Lipschultz. This credit reduces the double-tax burden you'd otherwise face when income earned abroad faces levies from the host country and the U.S.

Further, you cannot have both the additional child tax credit and the foreign income exclusion, as recently enacted legislation won't allow it.

"It's like eliminating the double benefit of the exclusion and the credit," said Joshua Ashman, a certified public accountant at Expat Tax Professionals in New York.

Whether it makes sense to take one or the other will depend on your circumstances and the tax regime of the nation where you're living.

Social Security, theirs or ours?

Large multinational employers may split their payroll so that a portion of your compensation is paid toward Social Security and Medicare throughout the year, Byrne said.

If you're working with a foreign company, however, your wages are subject to local taxes and you may be paying into a social welfare system there. Some countries, listed here, have an agreement with the U.S. to ensure that you aren't taxed twice for Social Security.

No overseas marriage break

Americans who meet and marry their spouse in their host country often think they can file a joint tax return, which you shouldn't.

U.S. citizens who are married to nonresident aliens generally file separately, rather than jointly. "This is going to have an effect on deductions, tax brackets and alternative minimum tax adjustments," said Lipschultz.

"It's a very complicated area, and individuals shouldn't take this task on by themselves," he said. "They should seek competent tax advice when going on a foreign assignment."