4 Tips on Income Tax for USA Citizens Overseas
For the nearly 10 million US citizens living abroad, the income tax implications of USA citizenship can be challenging, given the complexities of the rules and the scarcity of professional help in many parts of the world.
In this blog, we give a quick background on the rules of expat taxation, and we include some tax tips that are particularly relevant for this year’s filing.
Income Tax – USA System is Unique
Unlike all other countries in the world, U.S. citizens, even those residing outside the United States, are considered to be U.S. residents for tax purposes (an “income tax USA resident”) and are therefore subject to U.S. tax reporting on their worldwide income. Green card holders also have the status of U.S. tax residents, even if living abroad. Therefore, they are also required to file a return annually (regardless of their country of residence) and report their worldwide income.
Perhaps it is less well known that one may also be considered an income tax USA resident if the substantial presence test is met for the calendar year. Under this test, one must be physically present in the United States on at least: (a) 31 days during the current calendar year; and (b) a total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only one-third the number of days of presence in the first preceding year, and only one-sixth the number of days in the second preceding year.
Tax Tips for 2019
The following are 4 tax tips to keep in mind for this year’s filing:
Tip # 1 Incorporating new rules under Trump Tax Reform.
President Trump’s Tax Cuts and Jobs Act (or TCJA) introduced a number of important changes to the rules of income tax for USA taxpayers. Almost all of the changes come into effect during this tax season, so it’s important that they are taken into account in this years’ filing. For expat individuals, some of the main changes include: lowering of the ordinary income tax rates, increasing the standard deduction, eliminating many itemized deductions, increasing the child tax credit, and increasing the estate and gift tax exemption.
On the business and international sides, even more fundamental reforms apply. Examples include the decrease in the corporate tax rate (lowered to a flat rate of 21%), the elimination of the alternative minimum tax for corporations, a modified limitation on interest deductions, and the introduction of a one-time tax on deferred foreign business income. Moving forward, the TCJA imposes a new system of current-year inclusion for business owners of so-called “global intangible low-taxed income” of controlled foreign corporations. As a result of these new systems and rules, U.S. expats with businesses abroad will most likely find that this year’s return has additional complexities and more nuanced international forms to file and prepare.
Tip # 2 IRS delays are to be expected.
While the U.S. government shutdown ended several months ago, the ripple effects are still being felt in the form of delays in the IRS processing tax returns this year. Delays are also expected because of the many changes to the Tax Code under the Tax Cuts and Jobs Act.
Tip #3 Prepare for Certain Unique Deadlines.
For most U.S. expats, the tax return filing deadline is June 15. However, there are important exceptions. One example is the foreign bank account reporting form (FBAR), which has an initial deadline of April 15, but is automatically extended for 6 months to October 15. Another example relates to the reporting your ownership in a foreign trust (or pension treated as a trust for tax purposes), which has a unique deadline of March 15. This deadline can be extended, but only if you file your extension request by the initial due date.
Tip #4 IRS Continues to Offer Amnesty to Late Filers.
U.S. expats who haven’t been filing with the IRS should be aware —the reach of the IRS has gone global in recent years with the advancement of FATCA and other international tax agreements. However, the IRS continues to offer amnesty (potentially with no penalties) to those who are willing to make voluntary disclosures to the IRS. It should be noted that the IRS recently ended one of its tax amnesty programs (the “Offshore Voluntary Disclosure Program”), and there is no telling how much longer its other programs will stick around. Late filers should strongly consider coming back into compliance with the IRS before amnesty is no longer a viable option.
By Joshua Ashman, CPA & Nathan Mintz,, Esq.