Larry's 2016 U.S. Tax Guide 'Supplement' for U.S. Expats, Green Card Holders and Non-Resident Aliens in User Friendly English. Laurence E. 'Larry'
from someone who was referred by a mutual acquaintance. The person calling me would sheepishly tell me that he or she has a problem. What’s the problem, I ask. I haven’t filed my income taxes, he or she states. How long, I ask……. Well the longest time I’ve ever heard, in response, has been 37 years. If you have consistently had an annual tax bill due to the IRS, you are going to have some problems and you’d best consult someone to assist you. If, on the other hand, you have been consistently earning a salary overseas that is under the yearly maximum foreign earned income exclusion – if that’s your case, then no sweat – file for a few years of past due returns as well as the current year. This was the ‘unofficial’ way of doing things, for years. Then, on 18 June 2014, the IRS announced Streamlined Procedures for legitimate expatriates (with residency requirements just a bit more stringent than those one follows for the foreign earned income exclusion), with three years of tax returns and six years of FinCEN114 reporting as part of the requirements and certifying, through a new form, Form 14653, that the filer is non-willfully neglect in prior non-filings or incorrect filings. There’s a whole lot more detail about this program in a separate section of this book……read it – it could be quite beneficial to you.
If you have been around the world, living outside of the states for a while and you have a tax preparer doing your tax return for you, then it’s the bona fide resident that you are, my friend, and this is the way you’ve been filing – even if you didn’t realize that this is what your tax preparer has been listing for you, year after year after year. What’s that? You don’t look at the tax return that’s been prepared for you? Yeah, I’d like to say: ‘Shame on you!’ but let’s face it – very few people actually look at their tax return. This is the sad state of affairs we’ve come to, vis-a-vis the U.S. tax system: it is a system that has become so convolutedly impossible to understand that most filers simply sign and never look. You are signing this to be a true, complete and full return - you have a liability, if nothing else, to actually look at that bleeping return - even if you do not understand it....and if you do not understand it, then ask questions - this is part of what you have been paying for!!! You have no excuse for not looking at what you’ve been signing, attesting to be the truth, the whole truth and nothing but the truth…..because the penalty for not telling the whole truth could be costly….. For all intents and purposes, if you are legitimately a ‘lower end’ (income-wise) expat, you are fulfilling your legal responsibilities by filing an annual individual income 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. The maximum amount allowed for verifiable rents, repairs, utilities, insurance, furniture rental and parking costs is no longer unlimited. 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 $US16,000 – this is based upon an annual cost of living in the U.S. and to be specific, it is $US16,128 for tax year 2015 - 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 2016 – 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! What, you refuse to believe that? Then the only way you are going to find out is to read!!
• 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