If you’re an American citizen, it doesn’t matter where you go in the world. You can’t outrun, or out-fly, the Taxman.
Beware the Wrath of Uncle Sam
There are many advantages to moving overseas, especially for U.S. citizens (cha-ching!). But before you or your money leave the USA and say goodbye to Uncle Sam, there are a few tax and legal consequences you need to be aware of.
If you’re a U.S Citizen, Uncle Sam wants to know about your foreign assets, investments, or bank accounts. In fact, Uncle Sam says that you have 2 legal obligations that you must adhere to, or else!
Let’s go over these 2 legal obligations, shall we?
Obligation #1: Disclosure of Bank Accounts and Assets
You must disclose any foreign bank account whose value is over $10,000 (all foreign accounts are combined to reach the $10,000 threshold) and you must report any foreign asset (e.g. foreign stock, company ownership, etc.) whose value is $50,000 or greater.
The form required to be filed annually to disclose foreign bank accounts in excess of $10,000 is known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The form filed annually to disclose foreign assets with a value in excess of $50,000, is IRS Form 8938, Statement of Specified Financial Assets. The first obligation U.S. citizens have to their home country is the disclosure of foreign bank accounts and foreign assets.
Obligation #2: Pay Your Federal Income Taxes
As a U.S. citizen, you are required to pay U.S. federal income tax on the foreign income you receive. The U.S. taxes its citizens on income no matter whether it was earned in the U.S. or abroad. That’s one of several reasons our GNP is so high.
So, even if you make money outside the U.S., as a U.S. citizen, Uncle Sam says that you are still required to pay federal tax on that income. If you paid foreign income taxes to the country where the income was derived and if that country has a tax treaty with the U.S., then you’ll typically receive a credit in the U.S. for the foreign taxes paid, which reduces the amount of federal taxes owed in the U.S. You can look online for a current list of countries who have a tax treaty with the U.S.
Some U.S. citizens presume that if they leave the U.S. that they are no longer subject to federal income tax in the U.S. But this is not the case. Uncle Sam wants your (his) money. Failure to comply could result in a nasty tax dispute. And who has the time or energy for that?
Even if you relocate to a foreign country and no longer earn income from the U.S. you are still subject to U.S. tax your foreign income (and potential state income tax depending on your state of residence). There’s one last question on this topic some rebels or activists in the crowd may be wondering about.
How Can I Avoid Paying Taxes While Living Abroad?
The only way to keep Uncle Sam out of your pockets, (AKA the tax jurisdiction of the United States), is to renounce your U.S. citizenship. However, this is a costly and expensive process with numerous tax repercussions. Not to mention, Trump probably won’t be inviting you to anymore future Whitehouse dinners!
Here’s a common example that demonstrates how the disclosure and income tax reporting requirements work:
Say you have a bank account in Luxembourg with a balance of $99,999. That account generates income of $10,000 this year. Let’s say that the $10,000 in income resulted in taxes owed to Luxembourg of $1000 and that you reported and paid the tax to Luxembourg.
In addition to compliance with Luxembourg law, you would need to file FinCEN Form 114 (FBAR) to disclose the foreign bank account. The FBAR form filing is due by June 30th for the prior year’s accounts. You would also need to file IRS Form 8938, since the account was at or over $50,000.
Form 8938 is due with the filing of your federal tax return. In addition to the two disclosure forms that are filed in the U.S., the $10,000 of income from your Luxembourg account must be reported as taxable income on your income tax return (form 1040).
The $1000 paid in tax to Luxembourg will be credited to you as the tax owed to Uncle Sam because Uncle Sam and Luxembourg have a tax treaty. Woo, that was a lot of information right?
These are just the basics, but every country has their own tax dilemmas. There are many special rules and numerous exceptions to the filing you read about here, please don’t take this example too seriously. If you plan on leaving the U.S. or sending money outside the U.S., you should seek out experienced professionals to assist you with U.S. tax reporting obligations. Avoid the wrath of Uncle Sam. If you’re living abroad or planning to move, schedule your personal tax and business consultation today.