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Home run

By on November 29, 2008

Generally speaking, people find the topic of taxation extremely boring except when they find out that they are getting a refund. The sad news is that getting a tax refund means that you overpaid in the first place. Practitioners like to advise clients that they are getting a refund of an overpayment of tax because it leads clients to a feeling known as “Intaxication.” For US citizens and resident aliens who live outside of the United States, taxation can be fairly complex. While the intricacies of international living and working does overwhelm many, the lure of the opportunity to avoid US taxation is very strong. Brilliant arguments  such as, “How are they going to know?” Pub room tax advice, as I like to call it, is everywhere when you are working outside the United States and it often amazes me how many people fall victim to this advice by getting involved in schemes that are not only tax painful to Americans but turn out to be simply just bad investments in general.

To set the record straight, US citizens and resident aliens or green card holders are taxed on worldwide income.

This means ALL income regardless of source. Now this is not to say that you can’t avoid US taxation in some cases but, in order to avoid it, a taxpayer has to file a tax return and claim allowed avoidance opportunities. The first opportunity to avoid US taxation for Americans who live outside the United States is the foreign earned income and housing exclusion. The exclusions have to be claimed by filing a tax return. Many Americans mistakenly believe that, provided their earned income is under the exclusion amounts, they are not required to file. Nothing could be further from the truth. Filing is how you claim the exclusion.

Many expatriate Americans who have not filed for some time have asked me what they should do to catch up. Typically, I would advise them to file for every year that they have not complied. The statute of limitations for not filing a return remains open until the return is filed. However, when you file, the statute of limitations is three years, meaning it is better to file since the IRS then has three years from the date of filing to assert an adjustment or ask a question. The issues of non-compliance can sneak up on expatriate Americans – especially when they repatriate. For example, repatriates typically want to buy homes and after residing outside the US for some time find that they don’t have much of a credit history back home. Filing your US tax returns can at least help you to prove your income when
looking for a mortgage or other types of credit.

The cool thing about pub room tax advice is that it is so interesting. The uncool thing about pub room tax advice is it can be so tax painful.

Many expatriate Americans fall victim to purchasing investments in US-tax unfriendly schemes. Foreign life insurance policies and foreign mutual funds (foreign meaning non-US) are often very interesting to expatriate Americans, but keep in mind that if it appears too good to be true you can almost bet that it is. There are US-tax implications as well as penalties for non-reporting for investing in
these schemes.

Let’s face it, working overseas can be fun, exciting and worth the money. The object of this game is keeping the wealth you have earned, and if you keep more than $10,000 of that wealth outside the United States you are required to file forms with the Treasury Department to disclose your financial accounts. Of course, if you don’t comply the penalties are nasty – as much as $500,000 and imprisonment of up to five years.

When you are abroad, for whatever reason, you want to enjoy life and do things that you would not have done had you never left the United States. Earning a lot of money as an expatriate and keeping a good portion of it is a major goal we all share. So have fun, earn money and enjoy the “intaxicating” feeling.

 

Kenneth Guilfoyle, CPA, works exclusively with Financial Partners Group, Tokyo, and their US Expatriates on tax issues. For further information or to request a consultation, please contact Financial Partners Tokyo at FPTokyo@financial-partners.biz or 03 5575 3761.

About Kenneth Guilfoyle