NEW YORK (Reuters) - Out of sight, out of mind? Not for Americans at tax time.
Unlike most other countries, Uncle Sam requires its estimated 7 million expatriates, whether citizens or resident aliens, to file an income tax return with the Internal Revenue Service. Those living abroad get an automatic extension from April to June 15.
Even those who do not owe any money are required to detail their foreign bank assets over $10,000.
This also includes legal entities such as partnerships, corporations, and LLCs formed under U.S. law and trusts or estates formed under U.S. law.
“The U.S. has limited power, but the power they do have is significant,” said Greg Dewald, an entrepreneur in Salta, Argentina who runs Bright!Tax, a global tax preparation service.
Penalties for not getting the paperwork right include fees, liens on foreign assets, limiting the ability to travel to the U.S. and denying a passport renewal.
The following are five ways to make paying taxes from abroad less onerous:
1. Find a specialist
David Feldsott, who runs a technology start-up in Medellin, Colombia, learned about the tax problems for expats the hard way. He got confused by what he owed to the Colombian government and what he owed to the U.S.
“The mistakes I made, coupled with the complications of being an expat, is making me use an accountant,” said Feldsott, 30, who used to file on his own using tax software.
“I think people are running a big risk by not using an expert,” said Sebastien Chain, a lawyer based in Houston with the firm Chamberlain Hrdlicka White Williams & Aughtry who works with high net worth individuals worldwide.
2. Know the rules
The U.S. has arrangements with about 30 countries regarding contributions to their Social Security system, said Ines Zemelman, president of Taxes for Expats, a New York City firm. “It’s black and white. You make contributions to either one country or another.”
Americans living abroad also need to know how income is categorized in their adopted countries. “You have to follow the tax treaty and know what’s included in your income. In some countries, your health benefits are considered taxable income and this varies country by country,” said Dan Dagley, a lawyer at Dagley & Co in Washington, D.C.
3. Do not forget about deductions
Deductions matter, even when filing returns for income earned abroad.
“I helped my expat client save $3,000 using one federal tax form,” said Dean Ferraro, an enrolled agent tax preparer in Mission Viejo, California. “Most expats don’t realize that they can qualify for the home office deduction.”
His client was writing for various blogs based in the United States, working out of his cabin in Canada. Since he received his income on a 1099 Miscellaneous, he was able to file a Schedule C. The home office deduction allowed him to deduct a portion of rent expenses, utilities, and internet costs, which are substantially higher in Vancouver, British Columbia.
4. Do not forget state taxes
You might own a company stateside or rent out a residence there. The amount of state tax you owe “depends on the rules of each tax authority,” said Zemelman.
Some states are understanding and expats do not have to pay for services they are not there to receive, Zemelman added. These include New York, Massachusetts and California, while Virginia and South Carolina are tougher.
One key detail to note: Make sure you have a U.S. mailing address.
“Sometimes people discover they owe $10,000 to the state of South Carolina only three years later,” she said. That can be costly because states also have the legal power to claw back your federal tax refund.
5. Consider your U.S. citizenship
There is a growing rank of people who are giving up their U.S. citizenship. The Treasury Department reported 4,279 citizens renounced in 2015, up 25 percent over 2014 and 42 percent over 2013.
To see if this works for you from a tax perspective, Zemelman suggested making a thorough analysis of all your assets, financial and non-financial, U.S. and foreign, including the value of your primary house. “If the total value exceeds $2 million, talk to your financial advisor and tax advisor prior to scheduling an appointment at the embassy,” Zemelman said. “The decision is irrevocable.”
Editing by Beth Pinsker and Lauren Young; Editing by Diane Craft