Larry's 2015 U.S. Tax Guide for U.S. Expats, Green Card Holders and Non-Resident Aliens in User-Friendly English. Laurence E. 'Larry'
tax return. Yet, in all likelihood, since you are overseas, you file the return by hard copy, not eFiling your return. True, in the future, this will be changing, as all firms preparing 11 returns or over MUST eFile……unless each and every one of my clients signs a letter of understanding about the differences between eFiling and that old fashioned hard copy way. Me? I simply choose NOT to eFile either for myself or my clients. Call me a luddite, call me ‘computer challenged’, call me what you will but I would rather submit a hard copy of a return, knowing that I am aiding the process of screwing up a system that already is overloaded with far too much paper and has little capability of handling much more. Yet it is not only your patriotic duty but your legal responsibility to file, so don’t sweat not eFiling (which you are compelled to do, regardless, for FinCEN114), sign and send in that hard copy of your return - and keep a copy of that return along with your with proof of mailing, because the U.S. government loses things, too – they lose things far more than they’ll ever willingly admit!!
The Foreign Housing Exclusion
Not too many years ago, one had an unlimited amount that could be excluded under the foreign housing exclusion. Then Senator Chuck Grassley came along and under the Tax Increase Prevention and Reconciliation Act, limits were imposed, city by city by city, around the world. That maximum amount is allowed for verifiable rents, repairs, utilities, insurance, furniture rental and parking costs. What? You paid more than you are allowed? Tough luck! You have a limit, now, for the foreign housing exclusion. That exclusion would be the excess of all of these costs over a base amount of approximately $US15,000 – this is based upon an annual cost of living in the U.S. and to be specific, it is $US15,872 for tax year 2014 - that was deemed to be the average annual housing cost for tax payers residing in the U.S. Some people in some jurisdictions needed this exclusion for tax ‘fairness’ as these costs were truly part of their unreimbursed business way of life (mine to aspire to, yet never likely to attain..), part of the requirements going with that highest of levels of the biggest of the big. The tax act of May 2006 killed that…..such is life…..
It is interesting to note that neither bill that either the House of Representatives or the U.S. Senate passed, respectively, included the two items that Senator Charles Grassley, Republican of Iowa included within the conference bill which was then automatically passed by both houses of Congress and signed into law by the President. This is a truly sad commentary – we elect legislators who do not read what they vote upon, who rely upon legislative aides who do not have the time to read what is ‘hidden’ into many joint conference committee bills. The rider added to that bill now set limits on the maximum amount that could be excluded, based upon cost of housing, per location; and the graduated income tax, with progressive rates is, for all intents and purposes, inapplicable to those taking advantage of foreign earned income and housing exclusions: that the very first dollar over and above all valid expenses, deductions and exclusions would now be taxed as if the taxpayer were at the 33 percent tax bracket rather than starting out at the lowest 10 percent rate and working up to the higher rates – progressive taxation is now a thing of the past for expats. And, if you lived in a high cost of living/low tax jurisdiction (ie Singapore, Hong Kong, Dubai), you, the U.S. expat, could expect to encounter some previously unseen tax problems. It is now 2015 – sadly, nothing has changed in Washington. Do you think any of the 535 Congresspersons or Senators read Hire-FATCA of 2010? Not one! That, my friends, is a very, very sad commentary about American democracy…..
The Foreign Tax Credit
Executive summary: yes, you are entitled to a credit, offsetting your U.S. income tax with foreign income taxes paid but contrary to the most widely believed misconception, you will not get dollar-for-dollar.....and you might not get any credit at all.....SO BE AWARE!!! If you have to pay taxes, a lot of taxes to the jurisdiction where you have residency, even if it is a low tax jurisdiction, you might just be able to offset some of your U.S. tax obligation through the foreign tax credit. The tax you pay must qualify as income tax (not social welfare tax) legitimately owed or paid. And rest assured, you’ll definitely benefit if the foreign country where you reside taxes you at a higher rate than in the U.S. In China, for example, where there is a 45 percent maximum individual income tax, if you are earning enough to be in that bracket and paying a portion of your tax in the PRC at that amount, then you, as a U.S. expat or green card holder, will not likely have any U.S. individual income tax on that portion of your income because China is extracting more from you than the IRS is, in this instance.
Simultaneously, U.S. expats in Hong Kong – remember: one country/two systems through 2047, at which time Hong Kong’s tax system will be run by the State Administration of Taxation and not the Inland Revenue Department; until
such time, though, Hong Kongers who fall under the auspices of Hong Kong law must deal with the Inland Revenue Department – they will likely face a U.S. income tax as there is a 16.5 percent individual income tax in Hong Kong – far less than that 33 percent ‘entry level’ U.S. tax.
My Frequently asked questions by expats section....!
The IRS has FAQs for a whole lot of things. I have a question about their FAQs: How can you come up with a new program, issuing FAQs before a question has even been asked? Their FAQs are, by and large, impersonal, confusing, not user-friendly. My FAQs, on the other hand, are the opposite!
I’ve spent a bit of time listing – and hopefully answering to your satisfaction - the most frequently asked questions I’ve encountered over the years. Does a question here fit within the things you probably should know about but never asked or researched? Quite likely. Look through this section – it might prove to be very, very helpful to you!
• Where can I get good, readily available information about U.S. taxes, no matter where I am?
Where is your computer, my friend? Are you online? Then go to www.irs.gov and take a brief look at this website. Everything you conceivably would like to know (at least, the way that the IRS wants you to know it); every form and set of instructions that is currently available can be found off of this site. The site is a bountiful of item availability, though its sheer volume is also its downfall because sometimes it really is a task to find what you want – and these searches, unless you have plenty of patience, can likely end in frustration. Throughout this book, as I refer to either a tax form, the form instructions or an IRS publication, I will list the URL because while containing an abundance of information, the IRS site is too damned difficult to navigate and access – even for me!
Throughout this book, you’ll see me suggesting that you lok at IRS Publication 54. Yes, indeed, do so!! Look at Publication 54 – the ‘official’ set of guidelines for overseas U.S. tax filers – written for your benefit (if not enjoyment in reading) by your friends at the Internal Revenue Service! http://www.irs.gov/pub/irs-pdf/p54.pdf
And now…..those FAQs…..
• My spouse is not a U.S. citizen and has never lived in the U.S. How does this affect my federal tax status?
It’s one thing if you lived in the U.S. and something entirely different if you reside overseas. You might file a joint tax return. If so, then you’re going to have to get either a taxpayer identification number or a social security number for your spouse if you want to be able to take an exemption for her or maintain the MFJ standard deduction. Look up Form W-7 on the IRS site for getting a Taxpayer Identification Number if your spouse is not a U.S. citizen. http://www.irs.gov/pub/irs-pdf/fw7.pdf.
On the other hand, you might choose to file as married, filing separate or head of household. Obviously these would not give you the same standard deduction as you would get if you filed married, filing jointly..........but you would not be required to list either a social security number or a tax payer’s identification number for your spouse, your spouse’s income would not be reported on the U.S. tax return. Yes, I do know some U.S. taxpayers (either husband or wife) married to foreign citizens who earn income that, because the expat excludes them