Taxation of U.S. Citizens Abroad
Did you know that there are over 9 million citizens living outside the United States in over 160 countries throughout the world? And did you also know that these U.S. citizens are required to file U.S. income tax returns every year? But only a small portion of these Americans abroad are filing returns. Many of these citizens choose not to file because they owe no taxes, but this decision may result in serious consequences.
One common myth is that many of these taxpayers believe that if their income is under the Foreign Earned Income Exclusion threshold they are not required to file. In reality, a taxpayer must file a return to ELECT the Foreign Earned Income Exclusion. If you have not filed a return, you have not made an election and you cannot exclude the income. Another misinterpretation about this exclusion is that it applies to ALL foreign income. This is not the case. The exclusion applies only to “earned” income such as wages or business income. The exclusion does not apply to investment income. Finally, the taxpayer must meet either the bonafide residence or physical presence test to be able to claim the exclusion.
But more importantly, in addition to filing US tax returns, there are a numerous additional forms that may be required to be filed. These annual foreign reporting requirements carry very onerous penalties if they are not timely filed. It is important to note that U.S. persons living within the United States are also required to file these forms.…