Keeping a Piece of You: Taxation of U.S. Citizens Living Abroad

U.S. tax laws are relatively unique in that they require all U.S. citizens and resident aliens to file U.S. tax returns and pay U.S. taxes even if they are living abroad. In addition, even if they produce no interest, foreign accounts totaling $10,000 at any time during the year must be disclosed every year.

When asked why he moved back to the U.S. a few years ago, actor Johnny Depp replied: “Because France wanted a piece of me.” Instead of complying with demands to establish permanent residency status in France and pay taxes in both France and the U.S., Johnny packed his things and left.

But expats know that tax-wise, it’s really the U.S. that wants a piece of you.

Citizenship-based taxation

The U.S. citizenship-based (rather than residency-based) taxation scheme subjects the worldwide income of U.S. citizens to U.S. taxes, whether the taxpayer lives in the U.S. or not—even if the taxpayer is filing and paying taxes in another country. This tends to create confusion and/or frustration among dual citizens, U.S. citizens residing abroad, and individuals with spouses or partners who are foreign citizens.

Filing the FBAR

In addition to reporting and paying taxes on worldwide income – including income from foreign trusts, banks and securities accounts – U.S. taxpayers must also disclose foreign-held bank accounts that have held more than $10,000 at any time during the year, regardless of the average daily balance. This information must be disclosed on a Report of Foreign Bank and Financial Accounts (“FBAR”).

Frustration with FATCA

In addition to FBAR reporting, under the Foreign Account Tax Compliance Act (FATCA) taxpayers with foreign assets including but not limited to foreign bank accounts, real estate, stocks and other securities that are valued above a certain threshold must attach IRS FATCA Form 8938 to their annual tax return.

The FATCA IRS Form 8938 threshold depends on how you file, and whether or not you live in the U.S.:

U.S. Resident Non-U.S. Resident
Single $50,000 on last day of tax year, or $75,000 at any time during the tax year $200,000 on last day of tax year, or $300,000 at any time during the tax year
Married filing separately $50,000 on last day of tax year, or $75,000 at any time during the tax year $200,000 on last day of tax year, or $300,000 at any time during the tax year
Married filing jointly $100,000 on last day of tax year, or $150,000 at any time during the tax year $400,000 on last day of tax year, or $600,000 at any time during the tax year

FATCA also requires foreign banks to report their U.S. citizen account holders to the IRS and comply with a 30% withholding tax on distributions to account holders who refuse to identify themselves. This effort by the U.S. to uncover instances of tax evasion has enraged both taxpayers and foreign banks, many of whom see FATCA Form 8938 filing requirements as a violation of personal privacy laws and who claim that FATCA treats all US citizens residing abroad as tax cheats.

The minimum penalty for failure to file under FBAR or FATCA is $10,000. This is for non-willful violations. Willful violations carry much higher penalties and possible criminal charges.

Relief for those who have failed to file

Although the Offshore Voluntary Disclosure Program (OVDP) has closed, other options for tax penalty relief are still available. Whether or not you have complied with the required reporting, if you have foreign holdings that exceed the FBAR or FATCA thresholds you should contact the international tax attorneys at the San Francisco-based tax law firm of Moskowitz LLP.

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