Tax Advice for U.S. Citizens: File

March 10, 2006

In my last column, I explained that U.S. citizens living, working or investing in a foreign country are not released from their responsibility to the U.S. Internal Revenue Service (IRS).

In addition to reporting employment and investment income, the following items come into play in your dealings with the IRS.

Banking and Other Investment Accounts

One new responsibility of living in a foreign country is the reporting of bank accounts outside the United States to the U.S. Treasury Department. If the total value of all your foreign accounts worldwide exceeds $10,000 (for even one minute of one day), you must report these accounts. This includes accounts over which you have signing power and do not directly own.

The form does not carry any tax and is easy to file, but failure to do so is not easy to resolve. The problem begins when you elect to move yourself or your assets back to the United States. Consider: what are you going to say to the treasury agent when he knocks on your door and starts asking questions about your sudden deposits from outside of the country? You may have to prove that the money is not illegally gained, or that you have paid income tax on the money.

Building a Family

If you get married to a non-U.S. citizen, you must choose to file your tax return as married and filing a joint return, or married and filing separately. In either case, your new spouse needs to apply for a taxpayer identification number, even if he or she is a foreigner living outside of the United States.

If you choose to file a joint return with your spouse, the income your spouse earned worldwide during the tax year must be included in your income. Generally speaking, if your spouse has little or no income, you can save tax money by filing jointly. If your spouse has an income, it may be best for you to file a return as married and filing separately. You cannot file as single once you are married.

If your new spouse has children that are not U.S. citizens, they do not qualify as your dependents. This is true even if you support them 100%.

If you and your spouse have a child together, it is important that you promptly inform the U.S. Embassy of your new family member. This will enable you to apply for a U.S. Social Security number and citizenship on behalf of your child.

Buying and Selling Your Home

If you sell a home abroad and you meet the time requirements, you could be eligible for a $250,000 home exclusion. Precisely because you are selling a home in a foreign country, it is wise to show the sale on your tax return and show you are taking the exclusion. This will be helpful if you decide to return to the United States with the proceeds.

Social Security and Other Benefits

This is the same as if you were living in the United States. Combined with other income, your benefits could be taxable. Make sure your foreign income is included in your taxable income. If your income is solely from U.S. Social Security, it is not taxable and you do not have to file a return.

Beware! If you notice a reduction in your social security and other retirement benefits, it could be that the paying agency is assuming you are not a U.S. citizen because you reside outside of the United States, and the agency could withhold up to 30% of your benefits.

Inform the agency that you are a U.S. citizen, and not to withhold this money. The only way to have the money refunded is to file a timely tax return and request the refund.

If you are a U.S. citizen residing abroad and wish to return to the United States or hold assets there, do yourself a favor: do not ignore your responsibly to the U.S. government. File your income tax returns on time and avoid the possibility of unwanted and unnecessary trouble in the future.

For more information on U.S. taxation, call U.S. Tax & Accounting Service at 288-2201 or e-mail ustax@lawyer.com.

 

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