Leaving The U.S. Ignites Tax Complications
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Americans dreaming of less politically charged lives overseas should realize how U.S. tax obligations can reach into other countries.
The contentious looming U.S. election appears to have many Americans on both sides mulling a move overseas if their candidate loses, the topic of a recent informal survey by The New York Times. Even before the election, a third of Americans in another survey said they would move permanently to another country, significantly more Americans than said so a generation ago. The reasons often also extend beyond politics to family or job connections or a lifestyle choice.
Numbers are sketchy on how many Americans move permanently overseas annually, though The Association of Americans Resident Overseas says 5.5 million Americans now live in other countries. Popular destinations include Mexico, Canada, the United Kingdom, Israel, Vietnam and Germany.
Taxes also sometimes play a part in a country’s attraction for future expats: The United Arab Emirates is among nations with no personal income tax, for instance, and many Americans eye Portugal because of that country’s 10-year tax break on foreign-earned income.
But there’s more for Americans to think about regarding taxes – and citizenship – before moving across a national border.
You still have to file
If you remain a U.S. citizen, even though you live in another country you still must file U.S. taxes. This includes income tax returns, estate tax returns, gift tax returns and estimated tax. You must file a return if your gross income from worldwide sources is at least what the IRS shows for your filing status.
Sounds easy, but the U.S. National Taxpayer Advocate’s office recently reported to the U.S. Congress that taxpayers abroad face major problems meeting American tax obligations, including time lags for correspondence and administration, a “complex tax code” and declining levels of IRS customer service. Americans living overseas should probably prepare themselves to contest penalties for failing to file or for misfiling their tax returns.
If you are a U.S. citizen or resident alien residing overseas, you’re given an automatic 2-month extension to file your U.S. return without requesting an extension. If you still can’t file by then (generally mid-June), you can request an extension to Oct. 15 and an additional extension to Dec. 15.
FBARs
U.S. citizens living overseas might have or soon acquire bank accounts and other accounts in their countries of residence. The U.S. Bank Secrecy Act says that generally every American citizen (whether they live overseas or not) must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the U.S. Treasury. Reporting is done with a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114.
The FBAR is annual and due April 15 following the calendar year reported (you are allowed an automatic extension to Oct. 15). The FBAR is generally e-filed through FinCEN’s BSA E-Filing System and not part of a regular federal tax return. For each account you must report on an FBAR, required records are the name on the account, the account number, the name and address of the foreign bank, the type of account and the maximum value during the year. Generally, you must keep these records for five years from the due date of the FBAR.
U.S. citizens file an annual FBAR if the aggregate maximum value of all of their foreign financial accounts exceeds $10,000. The penalty for non-willful violation is up to $10,000; the penalty for willful failure is up to the greater of $100,000 or 50% of the amount of the balance in the account at the time of the violation.
U.S. expats may qualify, however, for the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction.
These are open to a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; a U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; or a U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
For 2024, the foreign income exclusion is $124,500.
Renouncing citizenship
The ultimate step for anyone moving to another country is to renounce citizenship of the nation they leave. For American citizenship, the process starts with meeting with an American diplomatic or consular officer and culminates with signing a formal renouncing of U.S. citizenship and paying of a processing fee (currently $2,350).
Though it does unshackle an expat from ongoing U.S. tax obligations (including taxation on worldwide income), renouncing U.S. citizenship is irrevocable without a lengthy appeal. Expatriates are, however, generally subject to a U.S. exit tax. The expat becomes subject to this tax if they have a worldwide net worth of $2 million or more on the date of expatriation; the expat’s average annual net income tax obligation for the five years ending prior to expatriation exceeds the threshold (for 2024, $201,000); or the expat fails to certify that they have complied with all U.S. federal tax obligations for the five years prior to their expatriation.
To calculate the tax for most assets, a “mark-to-market regime” applies as if the expat sold their worldwide assets at fair market value the day before expatriation and gains above an exclusion amount ($866,000 in 2024) are subject to U.S. capital gains tax. Some tax-deferred accounts such as traditional individual retirement accounts, Roth IRAs, health savings accounts, 529 college savings plans and others are considered fully distributed, and the total amount is subject to taxation as ordinary income.
Also, taxation of deferred compensation items depends on whether they are eligible or ineligible deferred compensation items. Distributions of income from non-grantor trusts to expats are subject to a 30% withholding tax at the time of distribution, and expats are also subject to the net investment income tax of 3.8%.
There’s a lot of tax information to cover when making the fantasy of moving to another country a reality. Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.
About the Author
Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors.
Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.
Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.
Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.
Alicea is fluent in Spanish and has a working knowledge of Portuguese.
Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).
Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.
In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique) and the Silver award for Accountancy Firm of the Year at the Magic Circle Awards. Furthermore, Alicea has consistently secured her position in the Global Elite Directory for four consecutive years, being recognized as a Private Client Global Elite Advisor and is currently listed for 2024 as a Non-Legal Adviser. This exclusive directory annually highlights the world’s elite lawyers and outstanding wealth advisors serving ultra-high net-worth clients.
Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.