5 Common Tax Myths That Can Cost the Expats Dearly
Many popular misconceptions surrounding the taxation of US expatriates are in existence and that's what confuses a lot of expats. Failing to submit government taxes is among the most common and costly mistakes made by Americans who relocate outside of the country.
Here are 5 most frequent US expats tax myths, duly explained and debunked.
Myth 1 - You Aren't Required to Submit a US Expat Tax Return if You Are Residing in a Foreign Country and Filing a Tax Return in that Country.
Fact - The US enforces citizen-based taxation that demands its citizens and permanent residents to submit annual tax returns regardless of their residence or earnings unless they’re included in the standard filing obligations. This is applicable even for the Americans who have never resided in the US (Accidental Americans) or who relocated from the US at an early age.
Myth 2 - You Only Have to Declare Your US-Sourced Earnings on Your US Expat Tax Return.
Fact - The IRS (Internal Revenue Service) charges expats on their global income. Regardless of where you work, if you are a US citizen, you must report your overall earnings, like you would have done while residing in the US. However, you can benefit from certain expat tax rules and advantages like the Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE).
Myth 3 - You Can Just Give Up Your Citizenship and Escape the Taxes.
Fact - Renouncing up your citizenship can perhaps rule out your US tax obligations in the long run, but it doesn't help in the immediate future. When you start your citizenship renouncement process, you are required to submit Form 8843, which testifies that you have been conformable on your US tax submissions for the last 5 years.
Myth 4 - You Don’t Have a Balance of $10,000 in Any Foreign Bank Account, so You Don't Need to Inform the IRS About the Money.
Fact - An informational document known as the Foreign Bank and Financial Account Report (FBAR), is electronically submitted annually to the treasury department. Any US account bearer with a financial involvement in, or signature control over single or multiple foreign financial accounts surpassing $10,000 in aggregate in a calendar year, must submit this form. This implies that if you have multiple financial accounts, the balance of your accounts must be summed up together to know whether you exceed the $10,000 threshold.
Myth 5 - If You Live Overseas and Avoid Filing the Required Forms, the IRS Won't be Able to Trace You.
Fact - Unfortunately, this isn't true because the IRS communicates tax data with foreign governments so the details of your income received from your country of your residence can be discovered. Also, the FATCA law (Foreign Account Tax Compliance Act) directs foreign banks to give complete account information of their US account bearers. So in case you default, the tax authorities can get in touch with you at a certain point in time.
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