Preparing for that less deadly of life's two certainties
For U.S. citizens and green card holders living abroad, the time has come again to comply with complicated U.S. income tax rules by filing a U.S. tax return. I have, as is my tradition, rented out this week's column for a nominal fee to my friends Marcia Doyle and Abigail Greef who will take you through some old and new requirements. As the rules on timely mailing are getting tougher, this annual feature is appearing earlier than usual.
The U.S. is the only country to require its non-resident citizens and green card holders to continue filing a tax return and to subject them to potential tax on income derived from sources outside its borders. For a fair portion of U.S. expatriates, their U.S. tax liability will be zero or close to zero while overseas. However, if they earn income that has its source in the U.S., or have a low host-country tax burden, then the result may be a more significant U.S. tax liability. U.S. expatriates with moderate-to-high income levels can also generate a U.S. tax liability through the alternative minimum tax system (AMT), regardless of the other factors mentioned above. AMT may be triggered by such items as large state and local tax deductions, deductions for accelerated depreciation or qualifying exercise of incentive stock options.
Even if no U.S. tax liability exists, the Internal Revenue Service (IRS) expects all non-resident taxpayers to report their earnings to them on an annual income tax return. The gross income thresholds that require the filing of a return are very low. Even if a large portion of income is excluded or reduced by tax credits, the IRS still requires that the documentation proving that fact is supplied to them on a timely basis.
The IRS has the power to enforce compliance with these rules. Failure to comply can result in costly future problems. The IRS can track down delinquent tax filers at any time; there is no statute of limitation associated with these rules. If a return is required (whether or not tax is due), the obligation to file will not simply disappear with time. In addition, foreign earned-income exclusion can be lost to delinquent filers in some circumstances. Non-resident taxpayers are advised to make every effort to meet their filing obligations.
For non-resident taxpayers, the initial filing deadline for their U.S. return is June 15 of the following year. Automatic extensions until Aug. 15 can be requested using Form 4868. The form must be sent to the IRS by June 15 at the latest. The IRS will grant additional filing extensions beyond Aug. 15 if sufficient cause is provided.
The due date for paying any income tax due is April 15 following the tax year. Interest will accrue on the balance due if any amount is not paid by that time. Additional penalties will be assessed if the tax remains unpaid beyond the filing date of June 15. To avoid penalties, the total U.S. tax liability for the year should ideally be estimated and paid in installments throughout the tax year. Any balance remaining to be paid for the year should be sent to the IRS by the following April 15 with the completed tax return or an extension application. If for whatever reason the taxpayer cannot make the payment by April 15, he or she should make the payment as soon as possible after this deadline.
Traditionally, the IRS accepted as timely returns mailed by taxpayers in foreign countries if postmarked on or before the return's due date. However, a recent court case has ruled that this applies only to returns deposited in U.S. mail. The safest answer is to mail the documents by a date that will ensure the IRS receives them on or before they are due.
The IRS has made it tougher to get around paying U.S. tax by relinquishing citizenship or a green card. Those deemed to be expatriating for tax avoidance purposes are subject to special U.S. taxation rules for up to 10 years after the date of expatriation. Those who want to make April 15 and June 15 just ordinary days by giving up their citizenship or green card should seek professional advice before doing so.
Finally, here are a couple of practical items that may assist overseas filers. Firstly, the IRS has made payment of taxes easier. In the past, payment was limited to a check or money order but now you may pay any federal tax due by using American Express, MasterCard, or Discover Card. To pay by credit card, taxpayers can call 1-888-2PAY-TAX (1-888-272-9829) and follow the instructions. The credit card processor will charge a convenience fee based on the amount the taxpayer is paying. The taxpayer will be told what the fee is during the call and will have the option to either continue or cancel the call. The fee should also be indicated on the Internet at www.8882paytax.com. If a taxpayer pays by credit card, the confirmation number of the call should be indicated on page 1 of Form 1040 in the upper left corner when filing the return.
Also, overseas filers who maintain a U.S. bank account may wish to have the IRS pay refunds directly into their account, rather than risk checks going astray or being delayed (by being routed overseas then having to go back to the United States for cashing). Bank account details can be entered on Form 1040, and hopefully those refunds will get to you that little bit faster!
Marcia Doyle is head of the U.S. tax group and Abigail Greef is a tax manager in the Brussels office of Arthur Andersen. Peter Ferrigno will be back next time.
