By John Ohe

American expats are subject to U.S. income taxes regardless of where they live and where they make their income. For 2013, individuals with income over $9,750 USD (or married couples filing jointly with income over $19,500 USD) must file a federal tax return. It is important to note that self-employed people have a much lower threshold. They are obligated to file a tax return if they have $400 USD or more in earnings.

There are financial penalties for not filing. In addition, there are incentives to file a tax return. For expat families with children <17 years of age, there is the child tax credit. As long as earned income is at least $3,000, there is a good chance you will qualify. Each child is worth up to $1,000 money back from the IRS.

Although the filing requirement casts a wide net, many U.S. expats end up not owing taxes because of certain exclusions and credits available to them. The most important of these are the foreign earned income exclusion (FEIE) and foreign tax credit. With the FEIE, up to $97,600 of foreign earned income while living abroad is excludable from federal tax. The $97,600 USD works in conjunction with other deductions. As a result, one can have more than $100,000 USD in income, and pay no taxes. With a working spouse, the excludable amount is doubled. In order to qualify for the FEIE, one must meet be either the bona fide residence or physical presence test. With the foreign tax credit, taxes that are paid to a foreign country offset U.S. tax liabilities. The foreign tax credit is normally utilized when one has paid income tax to a country with a higher tax rate than that of the U.S.

In addition to income tax returns, all U.S. expats with aggregate balances in foreign financial accounts above specific thresholds are required to file the appropriate informational reports. There are 2 reports that affect many people. The first is called FinCen 114 (formerly known as FBAR). The threshold is met if the aggregate balance (combining all the accounts) exceeds $10,000 USD at any point during the year. The second report is Form 8938 (FATCA). The threshold is much higher. For expats filing an individual tax return, it is $200,000 USD aggregate balance on the last day of the year, or $300,000 aggregate balance at any point during the year. For expats who are married filing jointly, the threshold is double.

The penalties for failing to disclose are onerous. With the FinCen 114, failure to report carries a penalty up to $10,000 USD. Willful non-compliance potentially raises the penalty up to $100,000 or 50% of the taxpayer’s foreign assets (whichever is greater). With FATCA, The maximum penalty for failing to file Form 8938 is $60,000 USD for each foreign asset that you failed to report (even more onerous than for the FBAR).

This article was written by John Ohe (IRS Enrolled Agent and managing partner at Hola Expat). For more information, visit us: HolaExpat.com

Disclaimer: The answers provided in this article are for general information, and should not be construed as personal tax advice. Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved.

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