Fact or Fiction?
Truth and myth. As a U.S. expat, seeking advice or trying to get clarity on the facts around taxes can be intimidating. Social media groups are helpful in lots of ways when you take the plunge to live abroad, but a simple question about taxes can result in everyone putting their two cents in and the truth can be harder to find than hen’s teeth. Incorrect information can result in paying stiff penalties, so let’s try and debunk the top five U.S. tax myths out there, and shed some light on the truth.
“I live in a new country and pay their taxes, so I don’t need to bother about U.S. taxes anymore”
The truth: You’re a U.S. citizen, so you’re taxed on citizenship, not residency. In fact, the U.S. is the only major nation in the world to do this. The cold hard truth is that wherever you live, you need to file. The sweet part is that there are exemptions in place, so you won’t pay tax twice on the same income. The rule to remember is that if you earn more than your standard deductions amount (in any currency) or $400 if you are self-employed, then you have to file your U.S. federal tax return every year.
“My savings and assets abroad are my own business, and have nothing to do with the IRS”
The truth: The IRS is the ultimate nosy neighbor, and needs to know everything, and this means filing your tax return and FBAR. Even if your money is spread out around multiple foreign accounts, if it totals at least $10,000 — in aggregate balance at any time during the year — then you are required to file.
“Now that I live abroad, I no longer have to pay any state taxes”
The truth: Wrong again…well, hold up, actually there is some truth there. It all depends on whether you plan to move permanently or return, and if so, will it be to the same state? You might be leaving, but do you still have property there that you earn income on from renting it out? If you’re leaving New Mexico, Virginia, South Carolina, and California then you must prove that you are gone for good, but then again, Wyoming, Washington, Texas, South Dakota, Nevada, Florida, and Alaska don’t tax residents at all.
“I’m gone and they will never find me!”
The truth: They will find you! Foreign governments share information with the IRS and it can find out what they need to know to track you down. Basically, if you have a bank account then they know where you are and what you earn. It’s the law, as the Foreign Account Tax Compliance Act mandates that all details of U.S. account holders are handed over if asked. There’s no place to hide!
“I had no idea I had to and it’s too late to file, I cannot do it now because I will face too many penalties”
The truth: Mistakes are allowed! The IRS has a Streamlined Filing Compliance Procedure that is available to taxpayers and allows them to certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.
So, there you have it, the IRS does have a heart, it’s not a myth!