Often, American expats and American Permanent Residents are unaware of the fact that they, as U.S. citizens or resident aliens living abroad, are required to file U.S. tax returns even if they do not owe money to the U.S. government or earn income in the U.S.
If you are behind on filing your U.S. taxes, you can file your prior year tax returns retroactively. If you are caught by the IRS, prior to filing your taxes, you may be subject to penalties, law fees and may be obligated to pay taxes that you were not obligated to pay if you filed for a Foreign Income Tax Exclusion. Some may even be criminally prosecuted for not filing.
How and When to File
The filing deadline for IRS Tax Returns for the previous year is April 15.
As a U.S. citizen or resident alien living overseas, you are entitled to an automatic 2-month extension to file your return, bringing your deadline to June 15. However, this extension only exempts you from late penalties – filing after April 15 will still incur an interest fee – if you owe taxes.
Some expats may qualify for the Foreign Earned Income Tax and Foreign Housing exclusions, as well as the foreign Housing Deduction. The Foreign Earned Income Tax Exclusion may qualify you to exclude from income up to a certain amount of your foreign earnings. The amount is adjusted yearly and is presently around USD 100,000. Thus, in most cases, if you do not make over USD 100,000 – you will not be required to pay any U.S. Income Tax. If you make over USD 100,000 you may be eligible to exclude the amount under USD 100,000 and deduct taxes paid for income earned beyond USD 100,000, thus, reducing your total taxable income.
To qualify, in short, your Tax Home (the general area of your main place of business, employment, or post of duty) must be in a foreign country and you must have “foreign earned income.”
Some sources of foreign income that are not deemed “foreign earned income” include:
- Pay received as a military or civilian employee of the U.S. Government or any of its agencies; and
- U.S. Pension or annuity payments (including social security benefits).
Even if you do meet the eligibility requirements for these exclusions or deductions, you shall still need, in most cases, to file a tax return. Additionally, you may be required to file an FBAR and FATCA Form 8938. We will discuss these in future posts on this blog.
Consequences for Failing to File your Tax Returns
At a minimum, consequences may include the loss of your tax refund or a “failure to file” penalty which could increase your bill by as much as 25 percent. In the most serious of incidents, the IRS may investigate you as a criminal non-filer and, in order to collect on money owed, levy your property, including your home. Some non-filers end up in the clink.
Being an expat can be a lot of fun, as you get to immerse yourself in a new country and a new culture. However, it is important to remember that as a citizen or resident alien you should immerse yourself in an understanding of U.S. Tax Law or hire someone that is, already, immersed.
Typically, law firms, with associations with accountants will file your taxes for around USD 500 for each year. These firms, will often, provide a discount if you file multiple years and the multiple years contains, basically, the same information each year.
Sean Hayes may be contacted at: SeanHayes@ipglegal.com. Sean is co-chair of the Korea Practice Team at IPG Legal.
He is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. Sean is ranked, for Korea, as one of only two non-Korean lawyers as a Top Attorney by AsiaLaw. Sean is known for his proactive New York-style street-market advice and his aggressive and non-conflicted advocacy. Sean works with some of the leading retired judges, prosecutors and former government officials working in Korea.
Sean’s profile may be found at: Sean C. Hayes
- File Your U.S. Taxes in Korea: Earned Income Tax Exclusion/FBAR
- U.S. Taxation of American Citizens/Permanent Residents Living Abroad
- Korean Year-End Tax Settlement: Common Errors & Omissions
- Korean National Tax Service Tax Law News Release to Foreign Corporate Taxpayers: Korean Tax Law Updates
- Can a Foreign Company be Deemed a Domestic Company for Tax Purposes and Taxed on Worldwide Income?
- 17 Percent Flat Tax for Foreign Nationals Residing in Korea: Korean Tax Amendments for 2013