US expats: don’t let the IRS put you in a bad mood this tax season

Sure, sorting through tax forms may not be a top priority for many US expats. But is it really worth putting things off when the result could be hefty penalties and huge administrative headaches?

US expats: don't let the IRS put you in a bad mood this tax season
Photo: Pixabay

For many, filing tax US returns is an unpleasant and complicated task under the best of circumstances. And most often, filing from abroad doesn’t make things any easier.

Not only do different rules apply, but even the ‘regular’ rules work in different ways – and keeping track of everything is no easy task.

To help sort through the confusion, The Local has compiled a list of some common tax questions asked by US expat readers.

For answers, we turned to Ines Zemelman, founder and President of Taxes for Expats (TFX) who specializes in American expatriate taxes:

Q: Are there any changes to the tax code that will affect US taxpayers living abroad? Has the incoming administration made any tax promises specifically related to expats?

A: This is certainly a huge topic of discussion. While this is purely conjecture, much of the focus has been on consolidating tax rates into three tiers (from the current seven), elimination of the estate tax, and possible corporate tax changes.

One item that has been discussed but yet not clarified is the possible increase of the standard deduction in conjunction with elimination of personal exemptions. This combination would disadvantage families with children.

Click here to see how TFX can help you

For example, a married couple without children would see a decrease of taxable income by $10,000, while a couple with three children would have a $3,000 increase in taxable income. Currently families with children can deduct $33,000 through standard deductions and personal exemptions, whilst under the new rules they could only deduct $30,000.

Q: I’ve never filed an FBAR, should I be afraid to start? What happens if I keep putting it off?

A: There is absolutely nothing to be afraid of, except inaction. If you are behind on tax returns, FBARs, or other reporting requirements, the IRS has instituted a specific programme to help you get compliant with amnesty from penalties. Our advice is to get compliant ASAP, as the only real risk is that the IRS changes the programme that allows people to avoid penalties by coming clean now.

Q: What's the difference between FATCA and FBAR? What are the consequences of not filing them?

A: They are similar in that they are both informational forms that describe your non-US financial accounts and do not generate any tax due. FBAR is a stand-alone form submitted to the US Department of Treasury and has a minimum filing threshold of $10,000 at any point in time in aggregate across all non-US financial accounts. FATCA (Form 8938) is submitted to the IRS as part of your US tax return and carries higher thresholds which vary depending on your location and filing status. You can learn more here.

Q: Should I file using the Foreign Earned Income Exclusion or the Foreign Tax Credit?

A: If you have children living at home you should consider using the Foreign Tax Credit (FTC), which allows you to claim the child tax credit ($1,000 per child). This credit can’t be utilized using the Foreign Earned Income Exclusion (FEIE). For example – a family with three children living in Germany, and earning €80,000, can get a $3,000 US tax refund with the FTC, but with FEIE they get no refund.

Get more expert tax advice with TFX

For those earning more money, however, the FEIE allows you to exclude up to $100,000 of income, so this option can lead to a lower tax outcome with some financial engineering. It’s also important to bear in mind that, if you utilize FEIE, and then choose not to, you cannot utilize it again for five years, so planning ahead is key.

Of course, it’s always wise to consult with a qualified expat tax professional to help determine which option is best for you.

Q: I’m looking to sell the home I purchased abroad. What are the US tax implications?

A: The tax implications are the same as if you owned property in the US: selling property abroad is a reportable item and the income must be reported on your US tax return. There may also be capital gains tax if you make a gain on the sale, but there are mitigating factors in place that allow you to exclude up to $250,000 of gains if the house was your primary residence.

Don’t fear the IRS. Let TFX handle it

You should also keep all records of money spent on home improvement, which can help raise the cost basis of your home. And the purchase of a home is not a reportable item in the year when the purchase occurred, however purchase-related expenses will be accounted for at the time of property sale.

Q: I've left my job and am now self-employed and living abroad. What do I need to do differently when I file taxes in the US as someone who is self-employed?

A: The biggest difference is that self-employed individuals may be liable for SECA (Social Security and Medicare) taxes. If you live in a country that has a totalization agreement with the US then you have the option to just pay into one system. If you live in a country that does not have one then you may face double taxation as you are required to pay into the US Social Security system and result in a 15.4 percent tax hit.

Q: I haven't filed a US tax return in years. What are the risks if I start filing now?

There is always a risk of getting audited when filing a tax return (roughly 2 percent of returns are audited annually), however the bigger, and far more realistic risk is failure to file penalties and FBAR penalties if you are under investigation by the IRS. Once an examination is underway, you would be ineligible for the amnesty programmes discussed above and at risk for draconian penalties. We strongly recommend to utilize the IRS’ olive branch and get into compliance right away.

Q: My local, non-American bank asked me to tell them whether or not I am a US citizen. What are the risks of sharing or withholding this information with my bank?

A: If you are a US citizen with a non-US bank account, the ‘FATCA Letter’ from your bank may come sooner or later because the local banking regulators are cracking down on them. You can either provide them with the information they want (simply that you are a US citizen and that you are up to date on your US tax returns), or you can risk having them close your account.

Remember – FBAR and FATCA do not carry tax implications – they are simply informational forms declaring your non-US financial accounts so that governments can track the flow of money and prevent money laundering. It’s best to use the streamlined foreign offshore programmes to get compliant without fear of penalties.

Still have questions? Click here to register with TFX for expert tax advice for US expats.

This article was produced by The Local and sponsored by Taxes for Expats (TFX).

For members


How to see if you have any notifications from the Spanish tax office

The Spanish tax system can seem a little daunting, but one way to simplify things and keep your mind at ease is to stay on top of your online notifications from the tax office. Here's how to do it online.

How to see if you have any notifications from the Spanish tax office

Spanish administration is, to say the least, a little laborious. Infamous for its longwinded, time-consuming processes and systems, even completing the most rudimentary of administrative tasks can become an ordeal and take an entire morning or afternoon as you head between the town hall (ayuntamiento) and bank and police station, and probably back again.

The Spanish tax system is no different, and the various rules and regulations can be particularly confusing. If you’re new in Spain or don’t speak the language, registering yourself, paying taxes and keeping on top of all the various documents and deadlines can be a bit daunting. 

READ ALSO: Will you pay more under Spain’s new social security rates for self-employed?

Many people choose to get a ‘gestor‘, which is like an all-in-one accountant and financial advisor that should, in theory, arrange everything for you. This is particularly common among self-employed people in Spain, as the tax system is even more convoluted for autónomos, as they’re known in Spanish.

They are the first port of call in Spain for the endless bureaucratic processes that come with anything official here; intermediaries between you and the often-complicated government departments.

READ ALSO: What does a ‘gestor’ do in Spain and why you’ll need one

Despite the complicated system of tax returns, fortunately, Spain’s tax office also has a safety net to help you keep on top of your tax obligations. 

Even if you have a gestor, they could miss something and it’s a good idea to be able to check your own notifications. 

 f you’re registered as a taxpayer in Spain, you’ll be able to check any notifications and obligations you have from them online.

Here’s how to do it.

How to see if you have any notifications from the tax office in Spain

  1. The first step is going to the tax office website, which you can access here. From there, you need to click on the ‘Todas las gestiones‘ button at the right of the blue banner at the top of the page.

2. Once you’ve done that you’ll see another page that looks like the one below. From there: click ‘otros servicios‘, which is the option at the bottom of the page.

3. Next, you click on ‘Notificaciones,’ which is halfway down the menu.

READ ALSO: Spanish tax returns: A handy guide for foreigners

4. That will take you to the following screen, where you need to click ‘Consulta de notificaciones y comunicaciones.’

5. You’ll then be prompted to log-in, so you can check your notifications, on a screen like the one below. You can do this with your NIE, digital certificate or [email protected] PIN.

A digital certificate is a piece of software in Spain that you can download on your computer, allowing you to identify yourself during administrative processes. Spain is notorious for its overly laborious bureaucratic systems, but the digital certificate can save you a lot of hassle and allow you to complete many processes online, without having to go in person to the various offices and agencies.

READ MORE: What are the fines and prison sentences for tax evasion in Spain?

If you haven’t got a digital certificate, you can find out how to get one here.

READ ALSO: Access all areas: how to get a digital certificate in Spain to aid online processes

6. Once you’ve done that and logged in, you’ll be taken to the following screen, which is like a sort of notification inbox. Any unread or outstanding notifications or messages you’ve got from the tax office will be in there, and you’re able to search for past documents by number, name, type, date, and whether or not you’ve read them before.

Or, alternatively, once you’re logged in with the digital certificate, you’ll be able to see if you have any unread notifications from the little blue button with your name that shows in the top right-hand corner of the page.