Top Five FAQs About Cross Border Tax Matters.
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It all started with a meeting early this year with an U.S. Citizen expat client who has familial ties and has moved to Nepal for a few years and they want to invest \ with a Nepali citizen in a business. They had been looking for a tax professional to work with who was familiar with cross border operations and had been searching high and low.
When they came to see me, I realized I mostly get the same set of questions from prospective clients looking for assistance filing their cross border taxes.
I would like to share the Top Five Questions your tax professional should be able to answer about your cross border tax matters.
If the tax pros are not able to address these matters or are out of their comfort zone, you should work with someone who can!
One: Do You Have To File and/ Pay Taxes If You Live Abroad?
YES! You do have to file your federal (and possibly state) tax return every year by the due date. The United States is only one of two countries where taxes are based on citizenship and not residency. All your US source income AND foreign income, including but not limited to wages; interest; dividends; rental income; business income etc. need to be reported on your US Form 1040.
If you are paying taxes in your country of residence, you may be able to claim a credit for the taxes paid and/ you also can take advantage of the Foreign Earned Income Exclusion also known as the FEIE. More about the FEIE in my post here.
Your taxes due need to be paid by the regular due date and you get an automatic extension until June 15th to file your return. You can file an extension to get four more months up to October 15th.
You can be penalized for not filing your returns every year.
Two: How About Your Foreign Bank and Financial Accounts?
The FBAR and FATCA dictate thresholds for which you have to file informational forms.
The FBAR threshold is $10,000 in aggregate balances whereas the FATCA thresholds depends on your filing status. Details about FATCA thresholds are in my post here.
More in depth info on the FBAR in an older post here.
Penalties for non-compliance are very high and it is best advised to work with tax professionals and use one of the amnesty programs to come into compliance if you have never filed these forms.
Three: Your spouse is not a U.S Citizen, can you/ should you include them on your U.S. tax return?
You may include your NRA spouse on your U.S tax return to avail lower tax brackets when filing as "Married Filing Joint". Please note that your spouse will then have to also declare all their foreign income and financial assets on the tax return to the U.S. Internal Revenue Service.
If they choose not to be dictated by U.S tax compliance, they may not file jointly. The filing status then available to you will be "Married filing Separate" or "Head of Household" if you have American Citizen dependents.
Note: Your spouse cannot be your dependent. And they will need an ITIN for purposes of filing jointly.
Four: Can I set up a business entity in a foreign country with a foreign national?
Yes, you can set up an entity in a foreign country with a foreign national. This entity can be a disregarded entity; partnership; or a corporation. Depending on the share of the holding in the entity, you will have to file a Form 8858; 8865; or 5471.
If this entity has a bank account which cross the FBAR thresholds and you have a signatory authority in these accounts, you will have to include these accounts on your FBAR.
Five: I have rental properties in the United States as well as in the foreign country where I live now. How do I report these?
All your rental properties, income & expenses whether located in the U.S or abroad need to reported on your US tax return via Schedule E attached to your Form 1040.
The depreciation treatment on the U.S. properties and the foreign ones differ. Any rental properties that are classified as a QBU or Qualified trade or business will also need to file Form 8858 for tax years 2018 and later.
A primer on foreign rental properties was posted here earlier.
Navigating financial and tax matters while straddling two countries, their different tax laws, rules and regulations is not for the faint of heart. Please work with a tax professional who can understand the nuances of these scenarios and guide you accordingly.
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Consult with an Enrolled Agent for your unique tax needs and make sure your questions are answered. Always remember to read my disclaimer here. If you have any more questions regarding this or other tax matters, contact me via my website www.mntaxbiz.com.