Our firm is keenly aware that life, employment, and business in the modern world routinely crosses international borders. Being a Boston-based Certified Public Accounting firm we routinely deal with employees, students, investors, and businesses that have cross-border exposure. Failure to comply with key provisions of the Internal Revenue Code can carry heavy penalties and with International Tax the focus is always on compliance.
More Useful Information About Our International Tax Accounting
The rise of a global economy during the 20th century coupled with more Americans living and studying abroad has created a high demand for international accounting firms. These accounting professionals receive additional training beyond the average CPA to be able to effectively assist individuals and businesses with all of their needs. For those that are working and/or studying abroad, hiring the right professionals can clear up any questions one may have about reporting income not earned in the U.S. and make tax filing time a lot easier and less confusing. They can also help reduce your tax liability and help you avoid double taxation in the U.S. and the country you’re working in.
International Tax Services
International tax planning services can assist both individuals who work or study abroad and companies that conduct business internationally. For individuals, qualified international accountants can assist with tax filings, foreign tax credits, student taxes, asset compliance, gifts and inheritance, and more. Businesses may hire a specialized CPA for help with cross-border tax structures, expatriation matters, and treaty interpretations, among other services.
International Tax Preparation
If you are one of the many U.S. citizens living abroad, tax time will be a bit more complicated for you. You’ll need to include certain forms when filing your tax returns to report foreign income and assets. The most common of these is Form 2555, which allows those citizens who work and reside outside of the U.S. and who meet the qualifications of the Bona Fide Resident or Physical Presence test to exclude all or part of their wages and/or self-employment income from U.S. federal income tax.
Individuals also need to file Form 1116 to claim the credit if they paid or accrued certain taxes to another country or U.S. possession.
You may need to include Schedule B, Interest and Ordinary Dividends, and/or Form 8938, Statement of Specified Foreign Financial Assets, with your U.S. tax return, if you earned funds from overseas investments and/or bank accounts.
If using tax preparation software, be sure the product you choose supports these forms; not all of them do. For a list of free software preparation options that have the required functionality (if your adjusted gross income for 2017 is $62,000 or less) the IRS website lists several suggestions online.
Or you can hire the services of a trusted professional who has experience dealing with circumstances similar to yours. They can ensure you are filing the correct forms to ensure you’re lowering your tax liability properly.
Do You Have to Pay Taxes As An Expat?
It’s tempting to assume that because you’re an American living and working overseas, you can skip sending U.S. tax forms to Uncle Sam. But the U.S. is one of two countries that tax its citizens no matter where they’re living (the other country is Eritrea.) Failing to report foreign income can trigger an audit and make you subject to paying high penalties. Fortunately, taking advantage of tax credits and reporting income properly can help reduce your tax liability.
And what if you’ve been living OS for several years without paying taxes and are worried that coming clean will incur high penalties? Expatriates can take advantage of the IRS tax amnesty programs such as the Streamlined Filing Compliance Procedures. They only have to file their last three years of tax returns and six years of FBARs (Foreign Bank and Financial Accounts Report) under this program.
Expatriate Tax – Foreign Tax Accountants
As noted, Americans working abroad still need to report their earnings and file according to U.S. laws. This obligation applies to both U.S. citizens or resident aliens (green card holders) living and/or working in a foreign country. Fortunately, one can avoid double taxation by taking advantage of U.S. tax code and credits that can reduce or eliminate tax issues and liability. The most common of these is the Foreign Earned Income Exclusion (FEIE) which allows people to exclude up to $102,100 of earned income in 2017 when filing. Note that earned income is actually earned from wages or a salary; passive income or capital gains earned from transactions such as selling a home or stocks out of country does not qualify as earned income. It is also possible to use taxes paid as a credit against their U.S. tax burdens.
In order to qualify for the FEIE, a taxpayer needs to pass the Tax Home Test, Bona Fide Resident Test, and/or the Physical Presence Test to prove they have lived and worked a qualified amount of days in a calendar year overseas.
It is also important to report foreign income of $10,000 or more including funds in checking, savings, investment, pension, and mutual fund accounts. They are also obligated to file U.S. state taxes, unless their current state of residence is Wyoming, Washington, Texas, South Dakota, Nevada, Florida or Alaska; these states do not collect state income tax from their residents and expatriates from the state. Residents of Tennessee and New Hampshire do not need to report foreign income, but still need to report interest and dividend income.
How Is Foreign Income Taxed?
Under current U.S. compliance laws, all worldwide income — including income from foreign trusts and foreign bank and securities accounts — is subject to being taxed. This also includes income earned from self employment if the amount exceeded $400 within the tax year.
Can You Deduct Foreign Taxes Paid?
The U.S. has several laws that allow expats and U.S. citizens with worldwide income to reduce their tax liability and avoid paying double taxes when living in another country. As previously noted, the Foreign Earned Income Exclusion (FEIE) makes it possible to exclude up to $102,100 of their earned income in 2017 when filing.
Worldwide taxation as a nation’s tax model is actually pretty rare; during the last 100 years many developed countries moved from a worldwide system to a territorial-based system. Under a worldwide system, resident individuals and businesses are taxed on their overall income regardless of where the income was earned or accrued. In a territorial system, the country accounts for only income earned within its borders, no matter where the taxpayer lives.
There have been proposals for suggesting the U.S. move from its current system to a territorial system, but the implications still need to be studied. The U.S. is one of the few countries in the world whose citizens are required to account for all income no matter where it’s earned.
What If I’m a Perpetual Traveler?
U.S. citizens that spend a lot of time on the road — or, rather, in the air — and that live in several international locations throughout the year may want to elect to be defined as a perpetual traveler to save on paying taxes. Someone can qualify as a perpetual traveler if they never spend more than 183 days per year in any one country, typically splitting their time throughout several countries. This is often the case with those with internet-based businesses who can work from any location in the world. To quality as a perpetual traveler, you’ll need to qualify for the Foreign Earned Income Exclusion (FEIE) using the 330 day test. Under current laws, the FEIE enables employees and business owners to pay nothing on up to $102,100 of earned income in 2017.
Knowing your foreign as well as domestic liability and what forms to file when you’re living overseas can be tricky, but an international accounting expert can help make tax time a lot less stressful, no matter where you currently call home.
While we are located in Boston we enjoy working with clients throughout the world. Call today to schedule your free consultation.