An Essential Tax Guide
for “Cross-Border” Professionals:
Five Important Tips for U.S. Taxpayers
with Foreign Income and Assets
Paying taxes is a necessary evil, but U.S. expats and foreign citizens living in the States have a trickier tax picture than most. Wealth management expert Andrew Fisher reveals five insights to help make tax season for “cross-border” citizens as simple and stress-free as possible.
If you’re a U.S. citizen living and working abroad, or a citizen of another country living here, you probably dread tax time. And with good reason: Paying Uncle Sam his share of income earned beyond our national borders can be tricky. Wealth management expert Andrew Fisher points out that cross-border professionals – the term he uses to describe working professionals living in a country other than their country of birth – face a far more complicated and confusing tax picture than most people.
“Having financial affairs outside of the U.S. invariably creates a unique tax situation,” says Andrew Fisher, CFA, CPA, and author of The Cross-Border Family Wealth Guide: Advice on Taxes, Investing, Real Estate, and Retirement for Global Families in the U.S. and Abroad (Wiley, 2017, ISBN: 978-1-1192342-7-2, $34.95.)” And failing to correctly pay your taxes puts you at risk for major fines and penalties.”
The tentacles of U.S. federal tax law reach farther than those of almost any other country.
“Anyone with financial ties to the U.S. falls under the jurisdiction of their stringent regulations,” says Fisher. “To add more confusion, many accountants are unable to provide cross-border professionals with sound advice about their taxes or any other financial concern. It’s easy to see why tax season is so, well, taxing for this group.”
In addition to offering in-depth insights on taxation questions and concerns, The Cross-Border Family Wealth Guide addresses topics like banking and cash management, real estate, entrepreneurialism, investments, and retirement and estate planning.
It’s not too late to get a handle on your own cross-border tax situation. Here are five of Fisher’s tips for making this year’s tax season a little less taxing after all.
Report all foreign accounts. Fisher explains that failure to report foreign bank accounts and other investment holdings can result in big penalties...sometimes even as much as the entire account balance. Owners of foreign accounts with higher balances must include form 8938 with their U.S. tax declarations. Foreign Bank Account Reporting (FBAR) filings must also be done separately, for accounts totaling over $10,000. In addition, the timing has changed to April 15 for U.S. residents. Foreign residents have until June 15 to file their FBAR.
Report all income to the IRS. Many people still believe that what they earn abroad is no business of the United States. Not so, warns Fisher.
“The U.S. is the only major tax system employing a worldwide tax based on citizenship, regardless of where you live,” says Fisher. “This means that even if you already are paying tax to a foreign authority on your foreign income, you still need to report it to the IRS and potentially pay U.S. tax. Don’t worry about being taxed twice; there is a system of tax credits and income exclusions that mostly eliminates double taxation.”
Move any taxable investment accounts to the U.S. – now. In case you haven’t heard, the IRS does not like U.S. taxpayers to own investment accounts located outside of U.S. borders. With the numerous scandals over the past decade involving foreign banks helping U.S. taxpayers to evade taxes, there is now much greater awareness about the inappropriateness of foreign investment structures for U.S. taxpayers. And, the IRS is applying reporting and tax rules more vigorously, which can be punitive.
Thus, even if you don’t get around to closing these accounts, you may get a letter from your foreign financial institution letting you know that your account is no longer welcome.
Here’s the bottom line: Although tax reporting across country lines is always more complicated, keeping your taxable investment accounts in the U.S. can simplify your tax life.
Report foreign rental income. Many cross-border families own property abroad. Often, they’ll hold onto a former home as an investment, and begin renting it out to create a passive income source. This often makes people wary about reporting the property on their U.S. tax return. They shouldn’t be, says Fisher.
“In most cases, these foreign rental properties are already taxed in the country where they are located, and that foreign tax becomes a credit against any potential U.S. tax,” he explains. “Because the IRS provides a tax shelter on real estate income – by allowing a tax deduction for non-cash depreciation expense – the U.S. tax liability from rental property income tends to be much lower than in most foreign countries.
Therefore, it is very rare that additional tax is due to the IRS over and above the taxes already paid abroad.”
Keep track of the capital gain exemption on a former residence. If you own a home that has appreciated significantly, you should be careful about converting that property to a rental. The IRS grants a $500k tax exemption to married couples ($250k if a single filer) on gains from the sale of a primary residence. This applies to foreign residences as well, so long as you lived there for at least two years. However, this exemption can be lost over time, and may be prorated if the property is subsequently rented out, once the home was not a primary residence for at least two of the previous five years. So, if you move away and sell the house more than three years after you no longer live in it, any gain from the sale will be fully taxable by the IRS (using the original purchase date converted to dollars, even if you had no connection to the United States at that time).
“Don’t waste this valuable gain exemption,” says Fisher. “Talk to a tax specialist about how the exemption can be applied in your case.”
Learning to navigate tricky tax situations can be painful, but it’s a small price to pay for the benefits of a global existence, says Fisher.
“Cross-border living is an emerging trend, and it’s one that can be incredibly rich and rewarding,” he notes. “No one enjoys taxes, but it’s simply a matter of learning the rules and adhering to them. If you are well prepared, you can navigate this year’s tax season without unnecessary mistakes, and then get on with enjoying your life.”
About the Author: Andrew Fisher is the president and founder of Worldview Wealth Advisors, an independent wealth management firm advising globally oriented families – both Americans living abroad and foreign citizens living in the U.S. He is also the author of The Cross-Border Family Wealth Guide, (Wiley, 2017, ISBN: 978-1-1192342-7-2, $34.95, www.worldviewwealth.com/book), a personal financial planning book for internationally oriented families.
The book is available at bookstores nationwide, from major online booksellers, and direct from the publisher by calling 800-225-5945. In Canada, call 800-567-4797. For more information, please visit the book’s page on www.wiley.com.
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