It’s tax season; a time of heartburn and heartbreak for many American tax payers. Unfortunately, even as an expat, you may have an obligation to pay taxes to the IRS. If you meet certain tests, such as the bona fide residence test, you may be able to omit some of your foreign earned income. If you don’t qualify, you can get credits for the taxes you pay to the country you live in, but you will still need to pay Social Security and Medicare taxes as well as taxes on some of your investment income through the Foreign Account Tax Compliance Act. Failure to do so can generate a penalty of as much as $10,000, making it extremely important that you comply in a timely manner.
Short of relinquishing your U.S. citizenship completely, there isn’t much you can do to avoid paying taxes to both the country you reside in and the U.S. While it’s important to consult an accountant who’s experienced in dealing with expat tax concerns, let’s take a brief look at some of the important dates and changes affecting both the 2012 and 2013 tax years for American taxpayers living abroad.
2012 Deadlines and Information
Expats get an automatic extension for filing and don’t need to submit their 1040 forms until June 17th, 2013. Their payments, however, are due on April 15th. Interest and penalties may be charged if you missed that date so the sooner you rectify that lapse, the better.
The automatic filing extension given to expats isn’t always enough time. Just as any other U.S. taxpayer can, expats may file form 4868 in order to get another 4-month extension pushing their 2012 filing date back to October 15th but remember that this does not extend the payment due date.
If you have foreign financial accounts with an aggregate balance of more than $10,000 you need to also complete the Foreign Bank Account Report form, which is form TD F 90-22.1. This is a 5-page form that asks for details about each of your accounts and their holdings. The form must be received (not postmarked, but received) by June 30th and there is no permissible filing deadline extension.
One last note on the Foreign Bank Account Report form; this form must be completed whether you have an actual financial interest in the accounts or just signature authority.
Finally, let’s talk about the Foreign Earned Income Exclusion limit (Form 2555). This exclusion got a pretty significant bump in 2012, when compared to previous years. Between 2009 and 2011 it only rose from $91,400 to $92,900 but in 2012 it’s been increased to $95,100.
When it comes to taxes, you can’t expect everything to remain the same from year to year. In 2013, there are a few changes that will affect many expats, including:
- The Foreign Earned Income Exclusion limit will rise again. This time, it’s moving from $95,100 to $97,600.
- The wage base for Social Security has increased from $110,100 to $113,700.
- The Affordable Care Act surtax will add a 3.8 percent tax on investment income when the investor’s modified adjusted gross income reaches a certain level. There had been rumors that the surtax would not affect expats who passed certain tests, such as the bona fide residence test, but unfortunately, that’s not true. Some expat investment income may be subject to that expanded 3.8 percent tax.
In 2014, there will be penalties introduced for some American residents who do not have health insurance coverage. Expats will not be charged this penalty, but that shouldn’t stop them from thinking about their healthcare coverage. Expat health insurance is a very valuable way to contain health insurance expenses and ensure the treatment options you are most concerned with. Expat health insurance even allows for worldwide protection while you travel and visit relatives in the U.S.
- Medicare taxes have increased from 1.45 percent to 2.35 percent for higher income individuals (wages over $200,000 for individuals and $250,000 for couples filing jointly). For those expats who don’t contribute to Medicare, there is a new .9 percent tax that will be charged.
- The payroll tax holiday has ended, raising Social Security taxes back to their former rate of 6.2 percent or, for self-employed individuals, 12.4 percent.
- Long-term capital gains tax rates increase to 50 percent for some dividends and gains when income exceeds certain level.
The tax code is ever evolving, sometimes for the better and sometimes for worse. Staying on top of these changes, even while you live abroad, is the best way to avoid unexpected surprises in the form of penalties and fines.